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Housing, home production, and the equity- and value-premium puzzles

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Author Info

  • Davis, Morris A.
  • Martin, Robert F.

Abstract

We ask if a standard representative agent model with a home-production sector can resolve the equity-premium or value-premium puzzles. In the model, agents value market (numeraire) consumption and a home consumption good that is produced from the stock of housing, home labor, and a labor-augmenting technology shock. We construct the unobserved quantity of the home consumption good by combining observed data on numeraire consumption, hours worked in the marketplace, and rents paid on housing with restrictions of the model. We test the first-order conditions of the model using GMM. The model is rejected by the data; it cannot explain either the historical equity-premium or the value-premium.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Housing Economics.

Volume (Year): 18 (2009)
Issue (Month): 2 (June)
Pages: 81-91

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Handle: RePEc:eee:jhouse:v:18:y:2009:i:2:p:81-91

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Web page: http://www.elsevier.com/locate/inca/622881

Related research

Keywords: Housing House prices Equity-premium Value-premium;

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References

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  1. Paul Gomme & B. Ravikumar & Peter Rupert, 2006. "The return to capital and the business cycle," Working Paper 0603, Federal Reserve Bank of Cleveland.
  2. Ellen McGrattan & Richard Rogerson & Randall Wright, 1995. "An equilibrium model of the business cycle with household production and fiscal policy," Staff Report 191, Federal Reserve Bank of Minneapolis.
  3. Davis, Morris & Heathcote, Jonathan, 2005. "The Price and Quantity of Residential Land in the United States," CEPR Discussion Papers 5333, C.E.P.R. Discussion Papers.
  4. David E. Lebow & Jeremy B. Rudd, 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand?," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 159-201, March.
  5. Ingram, Beth F. & Kocherlakota, Narayana R. & Savin, N. E., 1997. "Using theory for measurement: An analysis of the cyclical behavior of home production," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 435-456, December.
  6. Monika Piazzesi & Martin Schneider & Selale Tuzel, 2004. "Housing, Consumption and Asset Pricing," 2004 Meeting Papers 357c, Society for Economic Dynamics.
  7. Ricardo M. Sousa, 2005. "Consumption, (Dis) Aggregate Wealth and Asset Returns," NIPE Working Papers 9/2005, NIPE - Universidade do Minho.
  8. Morris A. Davis & François Ortalo-Magné, 2007. "Household Expenditures, Wages, Rents," CESifo Working Paper Series 2156, CESifo Group Munich.
  9. Greenwood, J. & Rogerson, R. & Wright, R., 1993. "Household Production in Real Business Cycle Thoery," RCER Working Papers 347, University of Rochester - Center for Economic Research (RCER).
  10. Yongqiang Chu, 2010. "An Intertemporal Capital Asset Pricing Model with Owner-Occupied Housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 427-465.
  11. Morris Davis & Jonathan Heathcote, 2004. "Housing and the business cycle," Finance and Economics Discussion Series 2004-11, Board of Governors of the Federal Reserve System (U.S.).
  12. Hansen, Lars Peter & Heaton, John & Yaron, Amir, 1996. "Finite-Sample Properties of Some Alternative GMM Estimators," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 262-80, July.
  13. Paul Gomme & Peter Rupert, 2005. "Theory, measurement, and calibration of macroeconomic models," Working Paper 0505, Federal Reserve Bank of Cleveland.
  14. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-57, September.
  15. Hanno Lustig & Stijn Van Nieuwerburgh, 2003. "Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perpective," NBER Working Papers 9959, National Bureau of Economic Research, Inc.
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Cited by:
  1. Ivan Jaccard, 2010. "Asset Pricing and Housing Supply in a Production Economy," 2010 Meeting Papers 605, Society for Economic Dynamics.
  2. Nikola Kojucharov & Clyde F. Martin & Robert F. Martin & Lili Xu, 2009. "The subprime mortgage crisis: irrational exuberance or rational error?," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.

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