Hedging housing price risks: some empirical evidence from the US

Li Bao, William Cheung*, Stephan Unger

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


We analyze household hedging costs and market liquidity of exchange traded options on a set of well-developed U.S. home price indexes allowing homeowners to hedge the downside risk of housing prices. We estimate empirically the impact of hedging costs on market liquidity of housing derivatives using prices from Case–Shiller Home Price Index (CSI) futures options and Barone-Adesi and Whaley [Efficient analytic approximation of American option values. J. Finance, 1987, 42, 301–320] simulations. We find that hedging costs significantly affect household savings resulting from hedging. We propose a new cost-based illiquidity measure for housing derivatives and link it with traditional contract-based liquidity measures in thinly traded derivatives markets. We document a negative relation between savings from hedging and our cost-based illiquidity measure. We further perform a series of robustness checks. Overall we suggest that the liquidity of exchange traded housing derivatives could benefit U.S. homeowners.

Original languageEnglish
Pages (from-to)1997-2013
Number of pages17
JournalQuantitative Finance
Issue number12
Publication statusPublished - 2020 Dec
Externally publishedYes


  • Case–Shiller home price index
  • Derivative market liquidity
  • House price hedging
  • Household finance
  • Real estate derivatives

ASJC Scopus subject areas

  • Finance
  • Economics, Econometrics and Finance(all)


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