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Hedging Housing Risk

Author

Listed:
  • 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.

Suggested Citation

  • Englund, Peter & Hwang, Min & Quigley, John M., 2001. "Hedging Housing Risk," SIFR Research Report Series 2, Institute for Financial Research.
    • Handle: RePEc:hhs:sifrwp:0002
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    References listed on IDEAS

    as
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    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General

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