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Marco Giacoletti, Idiosyncratic Risk in Housing Markets, The Review of Financial Studies, Volume 34, Issue 8, August 2021, Pages 3695–3741, https://doi.org/10.1093/rfs/hhab033
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Abstract
This paper studies the idiosyncratic risk component of individual house capital gains using data on resales and intermediate capital investments. The idiosyncratic component is large; its dynamics do not follow a random walk; and its magnitude is associated with proxies of information quality and market liquidity at the level of individual properties. Accounting for idiosyncratic risk substantially changes the assessment of the risk-return trade-off for housing: it reduces Sharpe ratios and makes them holding period dependent. I use a simple quantitative portfolio model to show that homeowners may be willing to make significant payments to insure against idiosyncratic housing risk.