Deriving Optimal Portfolios for Hedging Housing Risk
Posted: 21 Jun 2011
Date Written: June 20, 2011
Households that contemplate moving to different cities or trading up/down in the future are exposed to substantial housing risk. In order to mitigate this risk, we derive optimal portfolios using CME housing futures. Housing investment risk is hedged by selling housing futures amounting to the full value of the home. Housing consumption risk is hedged by buying housing futures in each city where the household might move. The size of the hedges depends on the probability of moving, on home values, and on labor income in each region. The hedging demands offset each other when the household intends to live in the same home indefinitely.
Keywords: Housing Derivatives, Optimal Portfolio Derivation, Hedging Strategies
JEL Classification: G11, G13, R29
Suggested Citation: Suggested Citation