Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 2: Hedging Housing Risk

Peter Englund , Min Hwang () and John M. Quigley ()
Additional contact information
Peter Englund: Swedish Institute for Financial Research, Postal: Swedish Institute for Financial Research, Saltmätargatan 19A, SE-113 59 Stockholm, Sweden
Min Hwang: University of California, Postal: Berkeley, CA 94720-3880, USA
John M. Quigley: University of California, Postal: Berkeley, CA 94720-3880, USA

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 of 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.

Keywords: Portfolio Risk; House Price Index; Hedging

JEL-codes: D60; G20; R00

39 pages, December 5, 2001

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