A comparative analysis of housing prices in different cities using the Black-Scholes and Jump Diffusion models

Abstract

This study investigates the price structure of urban housing markets comparing the Black-Scholes model and Merton's jump diffusion model with the expectation-maximization algorithm. As price jump information is hidden within the price change itself, an appropriate method must be used to deal with the hidden data. We check the validity of models in six cities using interval-ahead Monte Carlo simulations. We find that the jump diffusion model is well suited for analyzing the housing market and price structure in most cases.