Another application of call options: Explaining the divergence between the housing market and the rental market

Abstract

This paper proposes a model to discuss the influence of investors’ expectations on the equilibrium of rents and user costs. We treat volatility as a representing indicator of investors’ expectations and use call options as a proxy. We modify the traditional equilibrium by adding an option and use the cointegration test to verify whether the option value can explain the deviation between rents and user costs. The results show that the impact of volatility on the equilibrium of rents and user costs should not be neglected, and the value of real options can effectively measure the effect of volatility.