Arbitrage opportunities, efficiency, and the role of risk preferences in the Hong Kong property market
Studies in Economics and Finance
Emerald Group Publishing Ltd.
Housing investment, Investors with S-shaped and reverse S-shaped utilities, Risk averters, Risk seekers, Stochastic dominance, Urban studies
Purpose: This paper aims to investigate how a prospective buyer’s optimal home-size purchase can be determined by means of a stochastic-dominance (SD) analysis of the historical data of Hong Kong.
Design/methodology/approach: By means of SD analysis, the paper uses monthly property yields in Hong Kong over a 15-year period to illustrate how buyers of different risk preference may optimize their home-size purchase.
Findings: Regardless of whether the buyer eschews risk, embraces risk or is indifferent to it, in any adjacent pairing of five well-defined housing classes, the smaller class provides the optimal purchase. In addition, risk-averters focusing on total yield would prefer to invest in the smallest and second-smallest classes than in the largest class.
Research limitations/implications: As the smaller class provides the optimal purchase, the smallest class affords the buyer the optimal purchase over all classes in this important housing market – at least where rental yields are of primary concern.
Practical implications: The findings suggest that in the Hong Kong housing market, long-term investors may be better off purchasing smaller homes. For other type of investors, it depends on their risk preference.
Originality/value: There is a very small body of empirical literature on housing investment, especially if the focus is on the optimal home-size purchase.
This research has been partially supported by grants from Hong Kong Baptist University and the Research Grants Council of Hong Kong.
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Tsang, C.-K., Wong, W.-K., & Horowitz, I. (2016). Arbitrage opportunities, efficiency, and the role of risk preferences in the Hong Kong property market. Studies in Economics and Finance, 33(4), 735-754. doi: 10.1108/SEF-03-2015-0079