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A Theory of Housing Collateral, Consumption Insurance and Risk Premia

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  • Hanno Lustig
  • Stijn Van Nieuwerburgh

Abstract

In a model with housing collateral, a decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. This collateral mechanism can quantitatively replicate the conditional and the cross-sectional variation in risk premia on stocks for reasonable parameter values. The increase of the conditional equity premium and Sharpe ratio when collateral is scarce in the model matches the increase observed in US data. The model also generates a return spread of value firms over growth firms of the magnitude observed in the data, because the term structure of consumption strip risk premia is downward sloping.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10955.

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Date of creation: Dec 2004
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Handle: RePEc:nbr:nberwo:10955

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  1. Hanno Lustig & Stijn Van Nieuwerburgh, 2010. "How Much Does Household Collateral Constrain Regional Risk Sharing?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 265-294, April.
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Citations

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Cited by:
  1. Dirk Krueger & Fabrizio Perri, 2005. "The Research Agenda: Dirk Krueger and Fabrizio Perri on Risk Sharing across Households, Generations and Countries," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 6(2), April.
  2. Jiro Yoshida, 2008. "Technology Shocks and Asset Price Dynamics:The Role of Housing in General Equilibrium," CARF F-Series, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo CARF-F-119, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  3. Sven Rady, 2001. "Housing Market Dynamics: on the Contribution of Income Shocks and Credit Constraints," FMG Discussion Papers, Financial Markets Group dp375, Financial Markets Group.
  4. Lewellen, Jonathan, 2010. "Accounting anomalies and fundamental analysis: An alternative view," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 50(2-3), pages 455-466, December.
  5. Li, Haitao & Xu, Yuewu & Zhang, Xiaoyan, 2010. "Evaluating asset pricing models using the second Hansen-Jagannathan distance," Journal of Financial Economics, Elsevier, Elsevier, vol. 97(2), pages 279-301, August.
  6. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, Elsevier, vol. 96(2), pages 175-194, May.
  7. Morris A. Davis & Robert F. Martin, 2005. "Housing, house prices, and the equity premium puzzle," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2005-13, Board of Governors of the Federal Reserve System (U.S.).

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