Can Metropolitan Housing Risk Be Diversified? A Cautionary Tale from the Recent Boom and Bust

68 Pages Posted: 2 Aug 2012

See all articles by John Cotter

John Cotter

University College Dublin; University of California, Los Angeles (UCLA) - Anderson School of Management

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management

Richard Roll

California Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2012

Abstract

Geographic diversification is fundamental to risk mitigation among investors and insurers of housing, mortgages, and mortgage-related derivatives. To characterize diversification potential, we provide estimates of integration, spatial correlation, and contagion among US metropolitan housing markets. Results reveal a high and increasing level of integration among US markets over the decade of the 2000s, especially in California. We apply integration results to assess the risk of alternative housing investment portfolios. Portfolio simulation indicates reduced diversification potential and increased risk in the wake of estimated increases in metropolitan housing market integration. Research findings provide new insights regarding the synchronous non-performance of geographically-disparate MBS investments during the late 2000s.

Keywords: integration, correlation, contagion, house price returns

JEL Classification: G10, G11, G12, G14, R12, R21

Suggested Citation

Cotter, John and Gabriel, Stuart A. and Roll, Richard W., Can Metropolitan Housing Risk Be Diversified? A Cautionary Tale from the Recent Boom and Bust (August 1, 2012). Available at SSRN: https://ssrn.com/abstract=2121895 or http://dx.doi.org/10.2139/ssrn.2121895

John Cotter (Contact Author)

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://https://johncotter.org/

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2922 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://www.anderson.ucla.edu

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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