Arbitrage opportunities, efficiency, and the role of risk preferences in the Hong Kong property market
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.
Keywords
Acknowledgements
The authors would like to thank the Editor, Professor Robert Brooks and two anonymous referees for their constructive comments and suggestions, which helped them to more precisely clarify the results and substantially improve the early manuscript. Also, the authors would like to thank JunJie Gao, XiaoLong Li and Wayne Archer for their helpful comments on an earlier draft. The second author would also like to thank Robert B. Miller and Howard E. Thompson for their ongoing counseling and encouragement. This research has been partially supported by grants from Hong Kong Baptist University and the Research Grants Council of Hong Kong. The authors take sole responsibility for the final product.
Citation
Tsang, C.-K., Wong, W.-K. and Horowitz, I. (2016), "Arbitrage opportunities, efficiency, and the role of risk preferences in the Hong Kong property market", Studies in Economics and Finance, Vol. 33 No. 4, pp. 735-754. https://doi.org/10.1108/SEF-03-2015-0079
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited