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An Intertemporal Capital Asset Pricing Model with Owner-Occupied Housing

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  • Yongqiang Chu

Abstract

This article studies portfolio choice and asset pricing in the presence of owner-occupied housing in a continuous time framework. The unique feature of the model is that housing is a consumption good as well as a risky asset. Under general conditions, that is, when the utility function is not Cobb-Douglas and the covariance matrix is not block-diagonal, the model shows that the market portfolio is not mean-variance efficient, and the traditional capital asset pricing model fails. Nonetheless, a conditional linear factor pricing model holds with housing return and market portfolio return as two risk factors. The model also predicts that the nondurable consumption-to-housing ratio ("ch") can forecast financial asset returns. The two factor pricing model conditioning on "ch" yields a good cross-sectional fit for Fama-French 25 portfolios. Copyright (c) 2010 American Real Estate and Urban Economics Association.

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Bibliographic Info

Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 38 (2010)
Issue (Month): 3 ()
Pages: 427-465

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Handle: RePEc:bla:reesec:v:38:y:2010:i:3:p:427-465

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Cited by:
  1. Davis, Morris A. & Martin, Robert F., 2009. "Housing, home production, and the equity- and value-premium puzzles," Journal of Housing Economics, Elsevier, vol. 18(2), pages 81-91, June.

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