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

Review of Financial Studies, Forthcoming

40 Pages Posted: 11 Oct 2014

See all articles by John Cotter

John Cotter

University College Dublin; UCLA Anderson School of Management

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management

Richard Roll

California Institute of Technology

Date Written: September 18, 2014

Abstract

This study evaluates the effectiveness of geographic diversification in reducing housing investment risk. To characterize diversification potential, we estimate spatial correlation and integration among 401 US metropolitan housing markets. The 2000s boom brought a marked uptrend in housing market integration associated with eased residential lending standards and rapid growth in private mortgage securitization. As boom turned to bust, macro factors, including employment and income fundamentals, contributed importantly to the trending up in housing return integration. Portfolio simulations reveal substantially lower diversification potential and higher risk in the wake of increased market integration.

Keywords: integration, housing risk diversification, housing returns

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

Suggested Citation

Cotter, John and Gabriel, Stuart A. and Roll, Richard W., Can Housing Risk Be Diversified? A Cautionary Tale from the Housing Boom and Bust (September 18, 2014). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2507899

John Cotter

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://www.ucd.ie/bankingfinance/staff/professorjohncotter/

UCLA Anderson School of Management ( email )

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

Stuart A. Gabriel (Contact Author)

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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