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Optimal portfolio choice with predictability in house prices and transaction costs

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  • Stefano Corradin
  • José L. Fillat
  • Carles Vergara-Alert

Abstract

We study a model of portfolio choice, in which housing prices are predictable and adjustment costs must be paid when there is a housing transaction. We show that two state variables affect the agent's decisions: (i) his wealth-house ratio; and (ii) the time-varying expected growth rate of housing prices. The agent buys (sells) his housing assets only when the wealth-house ratio reaches an optimal upper (lower) boundary. These boundaries are time-varying and depend on the expected growth rate of housing prices. Finally, we use household level data from the PSID and SIPP surveys to test and support the main implications of the model, as well as portfolio rules and holdings of housing asset.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Risk and Policy Analysis Unit Working Paper with number QAU10-2.

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Date of creation: 2010
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Handle: RePEc:fip:fedbqu:qau10-2

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Keywords: Housing - Prices;

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  1. John Y. Campbell & Luis M. Viceira, 1998. "Consumption and Portfolio Decisions When Expected Returns Are Time Varying," Harvard Institute of Economic Research Working Papers 1835, Harvard - Institute of Economic Research.
  2. Robert F. Martin, 2003. "Consumption, durable goods, and transaction costs," International Finance Discussion Papers 756, Board of Governors of the Federal Reserve System (U.S.).
  3. Damgaard, Anders & Fuglsbjerg, Brian & Munk, Claus, 2003. "Optimal consumption and investment strategies with a perishable and an indivisible durable consumption good," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 209-253, November.
  4. Henkel, Sam James & Martin, J. Spencer & Nardari, Federico, 2011. "Time-varying short-horizon predictability," Journal of Financial Economics, Elsevier, vol. 99(3), pages 560-580, March.
  5. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
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Cited by:
  1. Corradin, Stefano & Gropp, Reint & Huizinga, Harry & Laeven, Luc, 2013. "Who invests in home equity to exempt wealth from bankruptcy?," SAFE Working Paper Series 21, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  2. Marekwica, Marcel & Stamos, Michael Z., 2010. "Optimal life cycle portfolio choice with housing market cycles," CFS Working Paper Series 2010/21, Center for Financial Studies (CFS).
  3. Stefano Corradin, 2013. "House Prices, Household Leverage, and Entrepreneurship," 2013 Meeting Papers 631, Society for Economic Dynamics.
  4. Corradin, Stefano, 2012. "Household leverage," Working Paper Series 1452, European Central Bank.
  5. Leonardo Martinez & Juan Carlos Hatchondo & Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 12/26, International Monetary Fund.
  6. Corradin, Stefano & Fontana, Alessandro, 2013. "House price cycles in Europe," Working Paper Series 1613, European Central Bank.
  7. Corradin, Stefano & Popov, Alexander, 2013. "House prices, home equity and entrepreneurships," Working Paper Series 1544, European Central Bank.

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