Journal of Real Estate Finance and Economics, 19:1, 5±7 (1999)
# 1999 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Introduction to the Special Issue: Interactions with
Frontiers of Financial EconomicsÐA Research
Agenda for Real Estate Finance
KOSE JOHN AND CROCKER H. LIU
Stern School of Business, New York University
Recent years have seen the emergence of substantial scholarly research in real estate-
®nance that uses the methodology and paradigms at the frontiers of ®nancial economics.
Agency theory, search theory, and signaling have appeared in several models of real estate
®nance (see, for example, Damodaran, John, and Liu, 1998; Damodaran and Liu, 1993;
Williams, 1993a, 1993b, 1995, 1998). Continuous time-valuation models of ®nancial
options, real options, and ®xed-income securities and term structure models have also
been applied in a number of papers on the pricing of mortgage-backed securities with and
without sophisticated prepayment structures (for example, see Dunn and Spatt, 1985,
1986; Grenadier, 1995, 1996; John, Liu, and Radhakrishnan, 1997; Stanton and Wallace,
1998; Williams, 1993a, 1993b, 1997). Paradigms of securitization and optimal design of
securities and organizational forms have also made their appearance in recent real estate
research (see, for example, DeMarzo and Duf®e, 1998; DeMarzo, 1998; Shiller and Weiss,
1998; Damodaran, John, and Liu, 1997).
The objective of this special issue is to showcase some of this research in real estate and
explore additional paradigms in ®nancial economics that would provide the framework for
interesting and innovative real estate research. In our lead article, ``What Is Real Estate
Finance?'' by Joseph T. Williams, the author discusses the relationship between the
academic research in real estate ®nance and the methods and paradigms at the core of
modern ®nance. Joe discusses which of the unsolved problems in real estate ®nance would
be of most interest to ®nancial economists. He also provides some interesting research
topics that are suggested by recurrent ®nancial anomalies and stylized facts in real estate.
Finally, Joe identi®es the problems in real estate ®nance that would be most amenable to
analysis using paradigms and techniques from the core of ®nance.
The next article, by Robert J. Shiller and Allan N. Weiss, is entitled ``Home Equity
Insurance'' and deals with the design of home-equity insurance policies. These policies
insure homeowners against declines in the prices of their homes. These products bear some
resemblance both to ordinary insurance and to ®nancial-hedging vehicles. Choices for the
design of such policies and underlying conceptual issues are discussed. Pass-through
futures and options are among possible choices, in which the insurance company
effectively provides homeowners with short positions in real estate futures markets or put
options on real estate indices. Another product is a life-event-triggered insurance policy, in
which the homeowner pays regular ®xed insurance premia in return for a claim contingent
on a suf®cient decline in the real estate price index and a speci®ed life event (such as a