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

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• John Cotter is Professor in Finance and the Chair in Quantitative Finance at University College Dublin.
• Thursday 11 June 2015, 13:00-14:00
• Room W4.03 Judge Business School.

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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.

Paper is available here

This talk is part of the Cambridge Finance Workshop Series series.

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