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The Effect of Housing on Portfolio Choice

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  • Raj Chetty
  • Adam Szeidl

Abstract

Economic theory predicts that home ownership should generally have a negative effect on risk-taking in financial portfolios, a result that affects the optimal design of a wide variety of financial and insurance policies. However, empirical work has not found a strong relationship between housing and portfolios. We identify two reasons for the divergence between the theory and data. First, it is critical to distinguish between home equity wealth and mortgage debt, as they have opposite-signed effects on portfolio choice. Second, it is important to isolate variation in home equity wealth and mortgage debt that is orthogonal to unobserved determinants of portfolios. We estimate a model that permits home equity wealth and mortgage debt to have different effects on portfolio shares. We isolate plausibly exogenous variation in home equity and mortgages by using differences across housing markets in average house prices and housing supply elasticities as instruments. Using data for 60,000 households, we find that increases in mortgage debt reduce stockholding significantly, while increases in home equity wealth raise stockholding. On net, an individual with 10% more mortgage debt and home equity has a 3% ower portfolio share of stocks. We conclude that housing has substantial impacts on portfolio choice, as theory predicts.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15998.

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Date of creation: May 2010
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Handle: RePEc:nbr:nberwo:15998

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  1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
  2. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
  3. Raj Chetty & Adam Szeidl, 2007. "Consumption Commitments and Risk Preferences," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 831-877, 05.
  4. Yamashita, Takashi, 2003. "Owner-occupied housing and investment in stocks: an empirical test," Journal of Urban Economics, Elsevier, vol. 53(2), pages 220-237, 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. Annette Vissing-Jorgensen, 2002. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," NBER Working Papers 8884, National Bureau of Economic Research, Inc.
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Cited by:
  1. Marekwica, Marcel & Schaefer, Alexander & Sebastian, Steffen, 2013. "Life cycle asset allocation in the presence of housing and tax-deferred investing," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1110-1125.
  2. 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.

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