Implied Volatility in UK Commercial Property Market: Empirical Evidence Based on Transaction Data

Posted: 20 Oct 2000

See all articles by Kanak Patel

Kanak Patel

University of Cambridge - Department of Land Economy

Tien Foo Sing

National University of Singapore (NUS) - Department of Real Estate

Abstract

The primary aim of this research is to compute implied volatility based on a stochastic contingent claim valuation model proposed by Dixit and Pindyck (1994). Over the sample period of 1984 to 1997, and with approximately 20,000 commercial property transactions in the UK, we find that implied volatility of rental returns is in the region of 24.83 percent. Over the same sample period, the historical and conditional standard deviations of the log returns of transaction-based rental series are estimated to be 15.60 percent and 35.64 percent respectively. The tests of information content of these risk measures show that there is strong orthogonality in the information impounded in implied volatility estimates compared to that contained in historical standard deviations.

Keywords: Contingent claim valuation, implied volatility, information content

JEL Classification: R3, R4

Suggested Citation

Patel, Kanak and Sing, Tien Foo, Implied Volatility in UK Commercial Property Market: Empirical Evidence Based on Transaction Data. Available at SSRN: https://ssrn.com/abstract=237811

Kanak Patel (Contact Author)

University of Cambridge - Department of Land Economy

19 Silver Street
Cambridge, CB3 9EP
United Kingdom
44 1 223 332174 (Phone)

Tien Foo Sing

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

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