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An Intertemporal Capital Asset Pricing Model with Owner‐Occupied Housing

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  • Yongqiang Chu

Abstract

This article studies portfolio choice and asset pricing in the presence of owner‐occupied housing in a continuous time framework. The unique feature of the model is that housing is a consumption good as well as a risky asset. Under general conditions, that is, when the utility function is not Cobb–Douglas and the covariance matrix is not block‐diagonal, the model shows that the market portfolio is not mean‐variance efficient, and the traditional capital asset pricing model fails. Nonetheless, a conditional linear factor pricing model holds with housing return and market portfolio return as two risk factors. The model also predicts that the nondurable consumption‐to‐housing ratio (ch) can forecast financial asset returns. The two factor pricing model conditioning on ch yields a good cross‐sectional fit for Fama–French 25 portfolios.

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  • Yongqiang Chu, 2010. "An Intertemporal Capital Asset Pricing Model with Owner‐Occupied Housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 427-465, September.
    • Handle: RePEc:bla:reesec:v:38:y:2010:i:3:p:427-465
    DOI: 10.1111/j.1540-6229.2010.00272.x
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    1. Ding, Xiaoya (Sara) & Ni, Yang & Rahman, Abdul & Saadi, Samir, 2015. "Housing price growth and the cost of equity capital," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 283-300.
    2. Vishaal Baulkaran & Pawan Jain & Mark Sunderman, 2019. "Housing “Beta”: Common Risk Factor in Returns of Stocks," The Journal of Real Estate Finance and Economics, Springer, vol. 58(3), pages 438-456, April.
    3. Davis, Morris A. & Martin, Robert F., 2009. "Housing, home production, and the equity- and value-premium puzzles," Journal of Housing Economics, Elsevier, vol. 18(2), pages 81-91, June.
    4. Hui, Eddie C.M. & Wang, Guangchen, 2015. "A new optimal portfolio selection model with owner-occupied housing," Applied Mathematics and Computation, Elsevier, vol. 270(C), pages 714-723.
    5. Charles Ka Yui Leung & Joe Cho Yiu Ng, 2018. "Macro Aspects of Housing," GRU Working Paper Series GRU_2018_016, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    6. Oh, Sebeom & Ku, Hyejin & Jun, Doobae, 2022. "A comparative analysis of housing prices in different cities using the Black–Scholes and Jump Diffusion models," Finance Research Letters, Elsevier, vol. 46(PA).

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