Can metropolitan housing risk be diversified? A cautionary tale from the recent boom and bust

John Cotter, Stuart Gabriel and Richard Roll
Additional contact information
Richard Roll: Anderson School of Business, University of California

No 201217, Working Papers from Geary Institute, University College Dublin

Abstract: Geographic diversification is fundamental to risk mitigation among investors and insurers of housing, mortgages, and mortgage-related derivatives. To characterize diversification potential, we provide estimates of integration, spatial correlation, and contagion among US metropolitan housing markets. Results reveal a high and increasing level of integration among US markets over the decade of the 2000s, especially in California. We apply integration results to assess the risk of alternative housing investment portfolios. Portfolio simulation indicates reduced diversification potential and increased risk in the wake of estimated increases in metropolitan housing market integration. Research findings provide new insights regarding the synchronous non-performance of geographically-disparate MBS investments during the late 2000s.

Keywords: integration; correlation; contagion; house price returns (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G14 R12 R21 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2012-08-02
New Economics Papers: this item is included in nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201217.pdf First version, 2012 (application/pdf)

Related works:
Working Paper: Can Metropolitan Housing Risk be Diversified? A Cautionary Tale from the Recent Boom and Bust (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ucd:wpaper:201217

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