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Assessing the Interaction between Real Estate and Equity in Households Portfolio Choice

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  • Beaubrun-Diant, Kevin
  • Maury, Tristan-Pierre

Abstract

In this paper, we provide a new empirical analysis of the dynamic portfolio decisions of households by simultaneously considering their stock market participation and home tenure choices. There is already a huge body of literature on housing status (own/rent) decisions and many contributions documented the low stock market participation rate of US households. Although some papers evidenced that the home status (modeled as an exogenous variable) has an impact on the stock proportion in portfolio, our paper is the first one to allow both decisions (home and stock) to be simultaneous and endogenous. We estimate a dynamic bivariate logistic panel data model on Panel Study of income Dynamics data from 1999 to 2007 controlling for sample selection bias and time-invariant unobserved heterogeneity. We first evidence that our original joint setup outperforms a standard one (with two distinct equations for stock holdings and for home tenure), i.e. marginal odds ratios are significant. Using these estimates, we are able to simulate individual paths of stock and home equity positions over the life cycle according to households attributes. Ceteris Paribus, we show that households taking positions in one asset (home or stock) encounter a positive position in the other asset at an earlier stage in their life cycle, i.e. some households appear to be locked in a no-stock-and-renter position.

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File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/7331/3/hfaiwp24_10_2011.pdf
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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/7331.

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Date of creation: Jul 2011
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Handle: RePEc:dau:papers:123456789/7331

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Keywords: households; Investment;

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  1. Ekaterini Kyriazidou, 1997. "Estimation of a Panel Data Sample Selection Model," Econometrica, Econometric Society, vol. 65(6), pages 1335-1364, November.
  2. Bartolucci, Francesco, 2007. "A penalized version of the empirical likelihood ratio for the population mean," Statistics & Probability Letters, Elsevier, vol. 77(1), pages 104-110, January.
  3. Campbell, John & Cocco, Joao, 2003. "Household Risk Management and Optimal Mortgage Choice," Scholarly Articles 3157876, Harvard University Department of Economics.
  4. Marjorie Flavin & Takashi Yamashita, 2002. "Owner-Occupied Housing and the Composition of the Household Portfolio," American Economic Review, American Economic Association, vol. 92(1), pages 345-362, March.
  5. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
  6. Bartolucci, Francesco & Farcomeni, Alessio, 2009. "A Multivariate Extension of the Dynamic Logit Model for Longitudinal Data Based on a Latent Markov Heterogeneity Structure," Journal of the American Statistical Association, American Statistical Association, vol. 104(486), pages 816-831.
  7. Francisco Gomes & Alexander Michaelides, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," Journal of Finance, American Finance Association, vol. 60(2), pages 869-904, 04.
  8. Sanford J Grossman & Guy Laroque, 2003. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Levine's Working Paper Archive 618897000000000803, David K. Levine.
  9. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
  10. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
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