To explain the low-frequency variation in US equity and debt returns in the 20th century, we solve an equilibrium model in which households face housing collateral constraints. An increase in the ratio of housing to human wealth loosens these borrowing constraintsthus allowing for more risk sharing. The rate of return that households require for holding equity decreases as a result. Feeding the historical time series of US housing collateral into the model replicates four features of long-run asset returns. (1) It produces a fifteen percent equity premium during the 1930s and a slow decline of the equity premium from eleven percent in the 1960s to four percent in 2003. (2) It generates large unexpected capital gains for equity holders, especially in the 1990s. (3) The risk-free rate and the housing collateral ratio are strongly positively correlated at low frequencies. (4) The model mimics the slow decline in the volatility of stock returns and the riskless interest rate.
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12766.
Length: Date of creation: Dec 2006 Date of revision: Handle: RePEc:nbr:nberwo:12766
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[Downloadable!]
Other versions:
Eugene F. Fama & Kenneth R. French, 2002.
"The Equity Premium,"
Journal of Finance,
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Eugene Fama & F. & Kenneth R. French, .
"The Equity Premium.","
CRSP working papers
522, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Ralph S.J Koijen & Otto Van Hemert & Stijn Van Nieuwerburgh, 2007.
"Mortgage Timing,"
NBER Working Papers
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