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Housing as a Measure for the Long Run Risk in Asset Pricing

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  • University of Chicago
  • Jose L. Fillat

Abstract

I use a non-separable utility function with non-housing consumption and consumption of housing services, which generates an intertemporal composition risk, besides the traditional consumption growth risk. The composition risk has effects for the valuation of cash flow growth fluctuations far into the future due to the persistence of consumption growth and housing services growth. I provide a closed form solution for the valuation function despite the non-separability. This allows me to quantify the price of risk in the long-run with inputs from an indirect inference estimation of the endowment process. I evaluate the different exposure to long-run risk of a cross section of portfolios of securities, and characterize the price of risk for different investment horizons. The model also explains the spread of the returns to different portfolios sorted in book to market and required housing returns, at different investment horizons.

Suggested Citation

  • University of Chicago & Jose L. Fillat, 2008. "Housing as a Measure for the Long Run Risk in Asset Pricing," 2008 Meeting Papers 483, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:483
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    Citations

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    Cited by:

    1. Jaccard Ivan, 2011. "Asset Pricing and Housing Supply in a Production Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-40, October.
    2. Kwan, Yum K. & Leung, Charles Ka Yui & Dong, Jinyue, 2015. "Comparing consumption-based asset pricing models: The case of an Asian city," Journal of Housing Economics, Elsevier, vol. 28(C), pages 18-41.
    3. Edward R. Lawrence & John Geppert & Arun J. Prakash, 2009. "An Empirical Investigation of the Campbell-Cochrane Habit Utility Model," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 774-791.
    4. Edward R. Lawrence & John Geppert & Arun J. Prakash, 2009. "An Empirical Investigation of the Campbell‐Cochrane Habit Utility Model," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5‐6), pages 774-791, June.
    5. Stefano Corradin & José L. Fillat & Carles Vergara-Alert, 2014. "Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 823-880.

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