COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1098

Mortgage Default Risk and Real Estate Prices:
The Use of Index-Based Futures and Options in Real Estate

Robert J. Shiller, Karl E. Case, and Allan N. Weiss

May 1995

Evidence is shown, using US foreclosure data by state 1975-93, that periods of high default rates on home mortgages strongly tend to follow real estate price declines or interruptions in real estate price increase. The relation between price decline and foreclosure rates is modelled using a distributed lag. Using this model, holders of residential mortgage portfolios could hedge some of the risk of default by taking positions in futures or options markets for residential real estate prices, were such markets to be established.