This dissertation is a contribution to the pricing and portfolio choice theory in incomplete markets. It consists of three self-contained but interlinked essays. In the first essay, we present a utility-based methodology for the valuation and the risk management of mortgage-backed securities subject to totally unpredictable prepayment risk. Incompleteness stems from its embedded pre-payment option which affects the security's cash flow pattern. The prepayment time is constructed via deterministic or stochastic hazard rate. The relevant indifference price consists of a linear term, corresponding to the remaining outstanding balance, and a nonlinear one that incorporates the investor's risk aversion and the interest payments generated by the mortgage contract. The indifference valuation approach is also extended to the case of homogeneous mortgage pools. In the second essay, using forward optimality criteria, we analyze a portfolio choice problem when the local risk tolerance is time-dependent and asymptotically linear in wealth. This class corresponds to a dynamic extension of the traditional (static) risk tolerances associated with the power, logarithmic and exponential utilities. We provide explicit solutions for the optimal investment strategies and wealth processes in an incomplete non-Markovian market with asset prices modelled as Ito processes. The methodology allows for measuring the investment performance in terms of a benchmark and alter-native market views. In the last essay, we extend the forward investment performance approach to study the optimal portfolio choice problem in an incomplete market driven by jump processes. The asset price is modelled by a one-dimensional Lévy-Itô process. We prove the existence of a forward performance process by restricting the local risk tolerance functions to be time-independent and linear in wealth. This yields only three types of performance measurement criteria, namely, exponential, power and logarithmic. The optimal portfolios are constructed via stochastic feedback controls under these criteria. / text

published_or_final_version / Housing Management / Master / Master of Housing Management

published_or_final_version / Housing Management / Master / Master of Housing Management

Housing is a dual commodity, which means it is not only a consumption, but an investment, good as well. Investors prefer larger units to smaller ones because larger units with higher ratios of the land-to-property-value will experience higher appreciation rates during a boom and enjoy higher liquidity. Therefore, changes in investment demand have a greater impact on the prices of larger units than on smaller units. Meanwhile, observations have revealed that buyers of smaller units are mostly prospective owner-occupiers driven by consumption demand. Thus, changes in consumption demand have a greater impact on the prices of smaller units than on larger ones. The aim of this study is to investigate the reasons for variations in the price movements of larger and smaller units. If the theory of the investment and consumption submarket holds true, the price differentials between larger and smaller units should capture the changes in investment and consumption demand. The changes in investment demand are measured by capital flows (the proxy of which is the LIBOR-to-HIBOR ratio) and the investment sentiment of the stock market (proxy: Hang Seng Index), whereas changes in consumption demand are measured by unemployment (proxy: unemployment rates). Three hypotheses are derived from the theory of the investment and consumption submarket: 1) The influx of large venture capital into Hong Kong should enlarge the price differentials, while the outflow of large venture capital should narrow them; 2) there is a positive relationship between investment market sentiment and the price differentials; and 3) the unemployment rate should positively affect the price differentials. In the empirical analysis, the price differentials between larger and smaller units are regressed on the variables of the LIBOR-to-HIBOR ratio, the Hang Seng Index, the unemployment rates, and other control variables. Quarterly data from 1985 to 2009 in Hong Kong is employed. The results of the ordinary least squares (OLS) method confirm the three hypotheses of capital flows, investment market sentiment, and unemployment. The empirical results of this study have potentially important practical and policy implications. The findings on the different effects of investment and consumption demand on the prices of larger units versus those on smaller units will offer homebuyers guidance on what to buy and when to buy it. Besides, studies on housing price should distinguish the price movements of larger and smaller units when different investment and consumption demands are concerned. Meanwhile, this study should shed light on investment activities. Other than conventional investment indicators, investors can predict price changes in larger units by tracking the influx or outflow of large amounts of capital to and from Hong Kong, respectively. The findings of this study should also help the government take action to influence the prices of larger units without affecting the smaller unit market, and vice versa. / published_or_final_version / Real Estate and Construction / Master / Master of Philosophy

The institution of property rights, as an important category of constraints or restrictions on human behaviour, provides rules of competition, and delineates the social and legal relationship between a resource owner and the others throughout the world. Forms of ownership rights to resources affect the efficiency of their use. The consensus is that in a real world with significant transactions costs and scarce resources, private property right systems lead to more efficient resource allocation than the others do. Previous studies about economic implications of non-exclusive resources have focused on the problems of resource misallocations. A few studies also worked on the effects that alternate property rights structures have on the prices and variations in prices of non-exclusive resources. However, the economic analysis of property rights attribute of natural resources used as building materials, such as natural sand and wood, is still an unexplored research area. The objective of the whole research is to empirically verify Angello and Donnelley's (1975) property rights thesis, as reinterpreted by Lai (1993a) and Lai and Yu (1995), that the variations in prices of non-exclusive resources are much greater than those under more exclusive ownership; and to identify, alternatively, the factors that might have affected ownership rights, inferred from changes in the variations in prices of the resources. In this thesis, published historical data of natural sand, Total declared costs of new buildings completed, Gross & Usable floor area, Gross value of construction work, and published government data of prices for selected buildings materials, namely Portland cement, sand, hardwood, and plywood, were used. The prices of captured and cultured shrimps, which are collected from super market and street market by the author, were also checked and used. These resources are subject to different degrees of access restrictions and, hence, are good candidates for testing the hypotheses. Basically, the hypotheses formulated in this research are strongly supported. The main findings are that the variations in prices of non-exclusive resources are greater than those of exclusive resources; for the same resource, the price ratios of exclusive resource and non-exclusive resource would fall over time. This is an original contribution to the theory of property rights. The originality of this dissertation lies in its exploration of the economic relationship between property rights ownership and selected building materials, as well as in the application of variances to the research of building materials. This is a novel contribution to research on Hong Kong’s sustainable development as she heavily relies on the real estate market for economic development. / published_or_final_version / Real Estate and Construction / Doctoral / Doctor of Philosophy

Real estate economists and practitioners have been cognizant of spatial autocorrelation in housing prices for more than three decades. In the early days, they relied to a huge extent on techniques developed in statistical science and focused exclusively on its identification and quantitative assessment in housing studies. It has been well-acknowledged that the presence of spatial autocorrelation in housing prices will compromise the applicability of conventional hedonic statistics, which may lead to biased and inconsistent estimates. In light of this, recent studies in the area have spawned an immense literature aimed at devising sophisticated econometric models such as hedonic spatial lag model and hedonic error model as correction methods. Interestingly, the underpinning factors attributing to its existence remain relatively theoretically unexplored due perhaps to a paucity of quality goereferenced housing data as well as the indifferent attitude espoused by the researchers. Although some general propositions regarding its causes have been proposed, they are accused of lacking inferential basis. Acknowledging the above research gap, this thesis attempts to investigate the underlying factors affecting the formation of, and change in, spatial autocorrelation in housing prices. Specifically, we conjecture that spatial autocorrelation is crucially determined by one of the economic workings of the housing market—price determination process. It is posited that the occurrence of the spatial phenomenon is a direct consequence of how market participants in search of past information in the market ascertain current housing prices. Specifically, spatial autocorrelation is deemed to be established, or increase, when property traders infer current housing prices from past sales of properties (i.e. comparables) located in the same neighborhood as the subject houses. Based on the above information search framework, we put forward three hypotheses to facilitate our examination. First, it is hypothesized that market volatility depresses spatial autocorrelation. As in any other commodity market, past sales transactions in real estate are important sources of price information, which become more obsolescent, and hence, fail to be a good price signal when the market is more volatile. Traders are compelled to rely less on past sales in establishing the current prices of the housing units. Accordingly, spatial autocorrelation will be diminished; following broadly the same line of logic, the second hypothesis is constructed, which states that market liquidity (defined as total market transaction volume) dampens spatial autocorrelation. Given that market liquidity reflects the amount of price information being circulated in the market, traders in accessing property values in a “thick” market do not have to necessarily infer from comparables that are located further away from the subject properties. Hence, a weaker spatial autocorrelation relationship between prices is resulted; third, building age is a critical factor in assessing a house’s redevelopment potential, whose value is largely independent of the transaction prices of the surrounding housing units. Given that a house’s total value can be perceived as an addition of its use value and redevelopment value (i.e. real option value of redevelopment), and that the former’s role decreases whereas the latter’s increases with building age in appraising its total value, it is therefore hypothesized that spatial autocorrelation decreases as building age increases. Several spatial autoregressive hedonic models are developed, with which the three hypotheses are tested using geo-coded open market transaction data in Hong Kong for the period of 1997 to 2008. The results indicate no contrary evidence rejecting any of the hypotheses at the 1% significance level. They soundly confirm the roles market volatility, market liquidity and building age played in the price determination process in real estate, as well as in the formation of spatial autocorrelation. The research findings of this thesis carry several straightforward but far-reaching implications beyond the theoretical literature, among which is the significance to, and impact on, property valuation and economic analysis of local housing systems. A better conceptual understanding on the causes of spatial autocorrelation in housing prices can greatly prompt the development of more parsimonious hedonic models, which are econometrically appealing. In this sense, statistical problems and complications (e.g. loss of degrees of freedom) associated with traditionally-used models, which generally routinely incorporate a long list of locational variables, can be circumvented. In addition, hedonic models derived based on our research findings, which give a simpler yet more realistic representation of the housing market, make real estate mass appraisals much less computationally-intensive. Real estate mass appraisals are used for a variety of purposes, including but not limited to taxation, mortgage assessment, government policy-making, and investment. They are of specific interest to accountants, bankers, real estate developers and investors, government authorities and economists. / published_or_final_version / Real Estate and Construction / Doctoral / Doctor of Philosophy

Ever since the tax reform in 1994 in China, local governments have to rely more and more on land and real estate related fees as a major source of revenue. With the rapid development of the financial sector in China, local governments also rely more on bank loans with real estate assets as collaterals to finance capital expenditure projects and other government expenditure. Many theoretical studies have suggested that the reliance of local governments on land and real estate related revenue has fuelled housing prices and rendered the central government’s policy to contain housing price escalation ineffective. However, so far there has been little vigorous empirical analysis that supports this argument. This study use panel data from 31 provinces over the period 1999 to 2010 to analyses empirically the role of provincial governments’ behavior in determining housing price levels in China. Our empirical results suggest that the behavior of provincial governments has contributed significantly to regional housing price disparity after controlling for social and economic factors. In particular, we found that the level of fiscal autonomy (local government revenue as a percentage of GDP) has an overall positive impact on housing prices and that such impact is stronger for provinces that are geographically more distant from Beijing. We also found that although the central government’s policy on the RMB exchange rate reform in 2005 has an overall positive impact on real housing prices due to inflow of speculative hot money, such impact varied across different provinces and thus also contributed to regional housing price disparity. Our empirical results suggest that speculative hot money tended to flow into housing markets in provinces with a more developed tertiary sector. This is because regions with more developed tertiary sector usually have more mature real estate markets, lower information costs, better financial and legal services, which facilitates flow of fund into and out of the housing market. This study contributes to the body of knowledge on regional housing price disparity. Unlike previous studies that only focused mainly on the impact of economic, social and government planning policies, this study also aimed at studying the role of fiscal and monetary policies in China. The results have important policy and practical implications. First, while the financial incentives and responsibility given to provincial governments may increase economic efficiency, they may also lead to conflicting goals between central and local governments. In addition such financial incentives and responsibility may unexpectedly lead to housing price bubbles that are economically and socially undesirable. Second, the central government’s policy to reform the exchange rate formation mechanism of the RMB in 2005 has also contributed to housing price escalation which may not be desirable from both social and political perspectives. Even worse still, the impact was not uniform but stronger in provinces with a more developed tertiary sector, which are usually wealthier provinces. Increase in housing prices in these provinces may lead to faster regional economic growth and thus contributing to even more sever regional income disparity, which contradicts the central government’s goal of reducing income polarization. / published_or_final_version / Real Estate and Construction / Doctoral / Doctor of Philosophy

Not available / text

published_or_final_version / Housing Management / Master / Master of Housing Management

published_or_final_version / Economics / Master / Master of Social Sciences