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Are Household Portfolios Efficient? an Analysis Conditional on Housing

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  • Pelizzon, Loriana
  • Weber, Guglielmo

Abstract

Standard tests of portfolio efficiency neglect the existence of illiquid wealth. The most important illiquid asset in household portfolios is housing: if housing stock adjustments are infrequent, optimal portfolios in periods of no adjustment are affected by housing price risk through a hedge term and tests for portfolio efficiency of financial assets must be run conditionally upon housing wealth. We use Italian household portfolio data and time series on financial assets and housing stock returns to assess whether actual portfolios are efficient. We find that housing wealth plays a key role in determining whether portfolios chosen by home-owners are efficient.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 43 (2008)
Issue (Month): 02 (June)
Pages: 401-431

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Handle: RePEc:cup:jfinqa:v:43:y:2008:i:02:p:401-431_00

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  1. Luigi Guiso & Tullio Jappelli, 2000. "Household Portfolios in Italy," CSEF Working Papers 43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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  7. Pelizzon, Loriana & Weber, Guglielmo, 2008. "Are Household Portfolios Efficient? an Analysis Conditional on Housing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(02), pages 401-431, June.
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  18. Marjorie Flavin & Shinobu Nakagawa, 2004. "A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence," NBER Working Papers 10458, National Bureau of Economic Research, Inc.
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