Option Value of Cash
39 Pages Posted: 17 Jan 2009 Last revised: 6 Sep 2011
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: Suggested Citation