Arbitrage opportunities, efficiency, and the role of risk preferences in the Hong Kong property market

Chun Kei Tsang*, Wing Keung WONG, Ira Horowitz

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    21 Citations (Scopus)

    Abstract

    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.

    Original languageEnglish
    Pages (from-to)735-754
    Number of pages20
    JournalStudies in Economics and Finance
    Volume33
    Issue number4
    DOIs
    Publication statusPublished - 3 Oct 2016

    Scopus Subject Areas

    • Economics, Econometrics and Finance(all)

    User-Defined Keywords

    • Housing investment
    • Investors with S-shaped and reverse S-shaped utilities
    • Risk averters
    • Risk seekers
    • Stochastic dominance
    • Urban studies

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