Idiosyncratic Risk in Housing Markets

Credit supply and house prices: Evidence from mortgage market segmentation

Marco Giacoletti and Stijn Van Nieuwerburgh

The Review of Financial Studies, 2021, vol. 34, issue 8, 3695-3741

Abstract: This paper studies the idiosyncratic risk component of individual house capital gains using data on resales and intermediate capital investments. The idiosyncratic component is large; its dynamics do not follow a random walk; and its magnitude is associated with proxies of information quality and market liquidity at the level of individual properties. Accounting for idiosyncratic risk substantially changes the assessment of the risk-return trade-off for housing: it reduces Sharpe ratios and makes them holding period dependent. I use a simple quantitative portfolio model to show that homeowners may be willing to make significant payments to insure against idiosyncratic housing risk.

JEL-codes: D1 G1 R00 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (11)

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