Hedging Housing Risk
AbstractAn 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 InfoPaper provided by Institute for Financial Research in its series SIFR Research Report Series with number 2.
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.
Contact details of provider:
Postal: Institute for Financial Research Drottninggatan 89, SE-113 60 Stockholm, Sweden
Web page: http://www.sifr.org/
More information through EDIRC
Portfolio Risk; House Price Index; Hedging;
Other versions of this item:
- Englund, Peter & Hwang, Min & Quigley, John M., 2002. "Hedging Housing Risk," Berkeley Program on Housing and Urban Policy, Working Paper Series qt06t5d6v0, Berkeley Program on Housing and Urban Policy.
- Peter ENGLUND & Min HWANG & John M. QUIGLEY, 2000. "Hedging Housing Risk," FAME Research Paper Series rp26, International Center for Financial Asset Management and Engineering.
- D60 - Microeconomics - - Welfare Economics - - - General
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-12-09 (All new papers)
- NEP-CFN-2002-12-09 (Corporate Finance)
- NEP-RMG-2002-12-09 (Risk Management)
- NEP-URE-2002-12-09 (Urban & Real Estate Economics)
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