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Owner-Occupied Housing: Life-Cycle Implications for the Household Portfolio

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  • Marjorie Flavin
  • Takashi Yamashita

Abstract

The paper constructs a model of optimal portfolio allocation incorporating the role of housing as collateral. Current house value is a state variable in the portfolio decision due to a nonconvex adjustment cost. Holding risk aversion constant, the percentage of the portfolio held in stocks is decreasing in the ratio of house value to net wealth; thus an older household with a lower ratio of house value to net wealth will generally hold more its portfolio in stocks than younger households. Empirical results using the Survey of Consumer Finances confirm the quantitative and statistical significance of the housing state variable.

Suggested Citation

  • Marjorie Flavin & Takashi Yamashita, 2011. "Owner-Occupied Housing: Life-Cycle Implications for the Household Portfolio," American Economic Review, American Economic Association, vol. 101(3), pages 609-614, May.
  • Handle: RePEc:aea:aecrev:v:101:y:2011:i:3:p:609-14
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.3.609
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    References listed on IDEAS

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    1. Marjorie Flavin & Shinobu Nakagawa, 2008. "A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence," American Economic Review, American Economic Association, vol. 98(1), pages 474-495, March.
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    Cited by:

    1. Sheng Guo & William Hardin, 2014. "Wealth, Composition, Housing, Income and Consumption," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 221-243, February.
    2. repec:cuf:journl:y:2017:v:18:i:1:zhaoli is not listed on IDEAS
    3. repec:cuf:journl:y:2017:v:18:i:2:zhao:li is not listed on IDEAS

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