ABSTRACT
This chapter reviews the notion of factors in classical finance and real estate finance. It describes the two new factor-based models of real estate derivatives proposed by Lecomte in line with Shiller’s early intuition. It then proposes solutions to overcome the difficulties inherent to the use of factor models. The chapter reviews the concept of stochastic process in real estate finance and devising a novel way to model commercial real estate’s price dynamics. The year 1982 was crucial in the history of modern finance with the introduction of index-based derivatives on United States (US) markets. Index-based derivatives’ innovativeness results from two unique features: cash settlement and the use of a broad financial index as underlying. A hedonic index seems like an astute way to combine commercial real estate’s two realms: a hedonic underlying encapsulates the spatial dimension through the selection of utility contributing variables while the derivative’s index-based structure accounts for the financial dimension.
