Option Value of Cash

39 Pages Posted: 17 Jan 2009 Last revised: 6 Sep 2011

See all articles by Jialin Yu

Jialin Yu

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Date Written: June 21, 2009

Abstract

This paper uses a dynamic model of heterogeneous beliefs (where investors agree to disagree) to study the positive price-volume correlation during a housing downturn. It shows: (i) beliefs may diverge, which prevents some pessimists from buying; (ii) in the case that beliefs cross (i.e., buyers become more optimistic than the sellers), home sales occur but are delayed due to the buyers' option to sell cash higher (using house as numeraire) if the downturn worsens. Such option to wait also has implications for the velocity of money during deflation, troubled assets in the crisis since 2007, IPO waves, and fire sales.

Keywords: house price, house sales, disagreement, resale option, fire sale

JEL Classification: G12, D83

Suggested Citation

Yu, Jialin, Option Value of Cash (June 21, 2009). Third Singapore International Conference on Finance 2009, Available at SSRN: https://ssrn.com/abstract=1328920 or http://dx.doi.org/10.2139/ssrn.1328920

Jialin Yu (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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