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Portfolio Choice with Indivisible and Illiquid Housing Assets: The Case of Spain

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  • Sergio Mayordomo

    ()
    (School of Economics and Business Administration, University of Navarra)

  • María Rodríguez-Moreno

    ()
    (European Central Bank)

  • Juan Ignacio Peña

    ()
    (Department of Business Administration, Universidad Carlos III de Madrid)

Abstract

This paper presents a procedure for computing the theoretically optimal portfolio under the assumption that housing is an indivisible, illiquid asset that restricts the portfolio choice decision. The analysis also includes the financial constraints households may face when they apply for external funding. The set of financial assets that constitute the household’s portfolios are bank time deposits, stocks, mortgage, and housing. We compare the theoretically optimal portfolio against Spanish households’ actual choices using a unique data set, the Spanish Survey of Household Finance. In comparison with the optimal portfolio, households significantly underinvest in stocks and deposits. In the case of mortgages, the optimal and actual portfolios weights are not unequal. At a more disaggregated level, some additional differences emerge that are explained by demographic, educational, and income characteristics.

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File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random50169a3d22927/1356049966_WP_UNAV_24_12.pdf
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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 24/12.

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Length: 52 pages
Date of creation: 21 Dec 2012
Date of revision:
Handle: RePEc:una:unccee:wp2412

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Web page: http://www.unav.es/facultad/econom

Related research

Keywords: Portfolio choice; Households; Indivisible illiquid assets; Financial constraints; Under-investment; Over-investment;

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