Risk-adjusted return on capital

Sharpe ratio

Archaeology

Capital formation

History

Financial economics

Epistemology

Philosophy

Econometrics

Economics

Microeconomics

Profit (economics)

Market liquidity

Quality (philosophy)

Portfolio

Monetary economics

Systematic risk

Capital (architecture)

Financial capital

Review of Financial Studies

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.

Idiosyncratic Risk in Housing Markets