Hedging Housing Risk

Peter Englund, Min Hwang and John M. Quigley ()
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Peter Englund: Stockholm School of Ecomonics
Min Hwang: University of California at Berkeley

No 1018, Berkeley Program on Housing and Urban Policy, Working Paper Series from Berkeley Program on Housing and Urban Policy

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 or 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.

New Economics Papers: this item is included in nep-fmk, nep-rmg and nep-ure
Date: 2006-06-27
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Related works:
Working Paper: Hedging Housing Risk (2000)
Working Paper: Hedging Housing Risk (2001)
Journal Article: Hedging Housing Risk (2002)
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Persistent link: http://EconPapers.repec.org/RePEc:cdl:bphupl:1018

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