Time-varying diversification strategies: The roles of state-level housing assets in optimal portfolios

Abstract

The study extracts quantitative implications of dynamic asset allocation strategies by analyzing time-varying roles of intertemporal hedging demands in multi-asset portfolios. It provides evidence of positive hedging demands for housing assets and spatial demand substitutions across different state-level housing markets. Risk-averse investors tend to switch their hedging demands from California to other states. The risk-diversification strategies provide insights into the vulnerability of some states to housing bubbles, and successfully characterize the recent housing boom-bust cycle. The framework governing return predictability suggests that stock and some state-level housing price returns can make one-period-ahead forecasts of housing asset prices.