Deriving Optimal Portfolios for Hedging Housing Risk

Posted: 14 Feb 2013

See all articles by Cristian Voicu

Cristian Voicu

Investment Technology Group

Michael Seiler

College of William and Mary - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 14, 2013

Abstract

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

Voicu, Cristian and Seiler, Michael, Deriving Optimal Portfolios for Hedging Housing Risk (February 14, 2013). Journal of Real Estate Finance and Economics, Vol. 46, No. 3, 2013. Available at SSRN: https://ssrn.com/abstract=2217828

Cristian Voicu

Investment Technology Group ( email )

44 Farnsworth Street
9th Floor
Boston, MA 02210
United States

Michael Seiler (Contact Author)

College of William and Mary - Finance ( email )

VA
United States

HOME PAGE: http://mason.wm.edu/faculty/directory/seiler_m.php

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