The Diversification Benefits of Free Trade in House Value

M.I. Dröes, Harry Garretsen and W.J.J. Manshanden
Authors registered in the RePEc Author Service: Martijn I. Dröes

No 12-03, Working Papers from Utrecht School of Economics

Abstract: This paper finds that homeowners could substantially reduce house price risk if they would reinvest their housing wealth in a market portfolio of houses. Free trade in the value of the house among homeowners would allow them to do so. To quantify the diversification benefits of free trade in house value, we estimate simple CAPM and APT models based on a detailed panel dataset of house price changes in the Netherlands. We find that about 92 to 96 percent of house price risk is diversifiable. In most cases, these diversification benefits outweigh the hedging effectiveness of house price futures.

Keywords: house price risk; free trade; financial market; diversification; futures (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ure
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