Homes and Castles: Should We Care about Idiosyncratic Risk?

Abstract

We consider a novel set of data comprising every transaction in the Netherlands ‘ housing market between 1995 and 2011, and take a closer look at the idiosyncratic risk as it played out in those years. Shiller and Weiss (1999) proposed a home equity insurance policy that eliminates systematic risk. We use their insurance scheme as an analytical tool to add detail to the comovement of individual transactions and the market. We are particularly interested in the policy’s loss coverage, efficiency, and payout probability. At best, protection against market risk is only around the half-way mark to risk elimination.