Hedging housing risk in London

Matteo Iacoviello and Francois Ortalo-Magne

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper investigates the benefits of allowing households to compensate the portfolio distortion due to their housing consumption through investments in housing price derivatives. Focusing on the London market, we show that a major loss from over-investment in housing is that households are forced to hold a very risky portfolio. However, the strong performance of the London housing market means that little is lost in terms of expected returns. Even households with limited wealth are better off owning their home rather than renting and investing in financial assets, as long as they are willing to face the financial risk involved. In this context, access to housing price derivatives would benefit most poor homeowners looking to limit their risk exposure. It would also benefit wealthier investors looking for the high returns provided by housing investments without the costs of direct ownership of properties. Comparisons with French, Swedish and US data provide a broader perspective on our findings.

JEL-codes: G10 G11 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2002-10-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://eprints.lse.ac.uk/24934/ Open access version. (application/pdf)

Related works:
Journal Article: Hedging Housing Risk in London (2003)
Working Paper: Hedging Housing Risk in London (2002)
Working Paper: Hedging Housing Risk in London (2002)
Working Paper: Hedging Housing Risk in London
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24934

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