Stabilising House Prices: the Role of Housing Futures Trading

  • Arzu UlucEmail author


This study investigates the effects of housing futures trading on housing demand, house price volatility and housing bubbles in a theoretical framework. The baseline model is an application of the De long, Shleifer, Summers and Waldman (1990) model of noise traders to the housing market, when the risky asset is housing. This adds new features to the model as households receive utility from housing services and cannot short-sell houses. The existence of noise traders in the housing market creates uncertainty about house prices, causes prices to deviate away from their fundamental values, and leads to a distortion in housing consumption. To investigate the impact of housing derivatives trading on the housing market, a new financial instrument, housing futures, is introduced into the baseline model. Housing futures trading affects house price stability through three channels: by (i) enabling households to disentangle their housing consumption decisions from investment decisions; (ii) allowing short-selling; and (iii) attracting an additional set of traders (pure speculators) looking for portfolio diversification opportunities. The results show that, for a large set of admissible parameter values, housing futures trading decreases the volatility of house prices and increases the welfare of households and investors.


Housing derivatives market Speculation House price volatility Short-selling Noise traders 



This paper is a chapter of my PhD dissertation at European University Institute. I am indebted to Russell Cooper, Nicola Gennaioli, Ramon Marimon and Jaume Ventura for their continuous advise and comments.

Compliance with Ethical Standards

Conflict of interests

The author declares that she has no conflict of interest.


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Copyright information

© Springer Science+Business Media New York (outside the USA) 2017

Authors and Affiliations

  1. 1.Bank of EnglandLondonUK

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