Aircraft Noise Derivatives

Abstract

Changing noise levels have a severe impact on house prices and through the leverage in financing on households wealth. This risk is essential for houses close to airports with uncertain aircraft regimes. We design and calibrate real options based on aircraft noise to hedge against noise risk. The underlying value is an index that measures the aircraft noise disturbance. The index depends on the geographical location, the development of the number of flight movements and potential changes in the operation variants of an airport. Since noise is not a traded asset, we use an equilibrium pricing method to obtain unique option values and calibrate the model using several data sets. Our findings show that the market price of risk is non-trivial, i.e. it depends on geography, future flight movements and organization of the traffic. We finally price the options and derive the option price sensitivities.