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Hedging Housing Risk

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Author Info

  • Englund, Peter

    (Swedish Institute for Financial Research)

  • Hwang, Min

    ()
    (University of California)

  • Quigley, John M.

    ()
    (University of California)

Abstract

An unusually rich source of data on housing prices in Stockholm is used to analyze the investment implications of housing choices. This empirical analysis derives market-wide price and return series for housing investment during a 13-year period, and it also provides estimates of the individual-specific, idiosyncratic, variation in housing returns. Because the idiosyncratic component follows an autocorrelated process, the analysis of portfolio choice is dependent upon the holding period. We analyze the composition of household investment portfolios containing housing, common stocks, stocks in real estate holding companies, bonds and t-bills. For short holding periods, the efficient portfolio contains essentially no housing. For longer periods, low risk portfolios contain 15 to 50 percent housing. These results suggest that there are large potential gains from policies of institutions that would permit households to hedge their lumpy investments in housing. We estimate the potential value of hedges in reducing risk to households, yet yielding the same investment returns. The value is surprisingly large, especially to poorer homeowners.

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Bibliographic Info

Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 2.

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Length: 39 pages
Date of creation: 05 Dec 2001
Date of revision:
Publication status: Published in Journal of Real Estate Finance and Economics, 2002, pages 167-200.
Handle: RePEc:hhs:sifrwp:0002

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Postal: Institute for Financial Research Drottninggatan 89, SE-113 60 Stockholm, Sweden
Phone: +46-8-728-5120
Fax: +46-8-728-5130
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Web page: http://www.sifr.org/
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Keywords: Portfolio Risk; House Price Index; Hedging;

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References

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  1. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
  2. Karl E. Case & Robert J. Shiller & Allan N. Weiss, 1991. "Index-Based Futures and Options Markets in Real Estate," Cowles Foundation Discussion Papers 1006, Cowles Foundation for Research in Economics, Yale University.
  3. Englund, Peter, 1999. "The Swedish Banking Crisis: Roots and Consequences," Oxford Review of Economic Policy, Oxford University Press, vol. 15(3), pages 80-97, Autumn.
  4. John F. Kain & John M. Quigley, 1975. "Housing Markets and Racial Discrimination: A Microeconomic Analysis," NBER Books, National Bureau of Economic Research, Inc, number kain75-1, July.
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  7. Brueckner, Jan K, 1997. "Consumption and Investment Motives and the Portfolio Choices of Homeowners," The Journal of Real Estate Finance and Economics, Springer, vol. 15(2), pages 159-80, October.
  8. Englund, Peter & Quigley, John M. & Redfearn, Christian L., 1998. "Improved Price Indexes for Real Estate: Measuring the Course of Swedish Housing Prices," Journal of Urban Economics, Elsevier, vol. 44(2), pages 171-196, September.
  9. Case, Karl E & Shiller, Robert J, 1989. "The Efficiency of the Market for Single-Family Homes," American Economic Review, American Economic Association, vol. 79(1), pages 125-37, March.
  10. Goetzmann, W.N., 1990. "The Single Family Home In The Investment Portfolio," Papers fb-_90-15, Columbia - Graduate School of Business.
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  12. Flavin, Marjorie & Yamashita, Takashi, 1998. "Owner-Occupied Housing and the Composition of the Household Portfolio over the Life Cycle," University of California at San Diego, Economics Working Paper Series qt89x293v9, Department of Economics, UC San Diego.
  13. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-78, July.
  14. Tracy M. Turner, 2003. "Does Investment Risk Affect the Housing Decisions of Families?," Economic Inquiry, Western Economic Association International, vol. 41(4), pages 675-691, October.
  15. Sweeney, James L., 1974. "Housing unit maintenance and the mode of tenure," Journal of Economic Theory, Elsevier, vol. 8(2), pages 111-138, June.
  16. Englund, Peter & Ioannides, Yannis M., 1997. "House Price Dynamics: An International Empirical Perspective," Journal of Housing Economics, Elsevier, vol. 6(2), pages 119-136, June.
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