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An Intertemporal Capital Asset Pricing Model with Owner-Occupied Housing


  • Yongqiang Chu


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. Copyright (c) 2010 American Real Estate and Urban Economics Association.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:reesec:v:38:y:2010:i:3:p:427-465

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    References listed on IDEAS

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    2. Dhillon, Upinder S & Shilling, James D & Sirmans, C F, 1987. "Choosing between Fixed and Adjustable Rate Mortgages: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 260-267, May.
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    5. James VanderHoff, 1996. "Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market Conditions: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(3), pages 379-406.
    6. Posey, Lisa L. & Yavas, Abdullah, 2001. "Adjustable and Fixed Rate Mortgages as a Screening Mechanism for Default Risk," Journal of Urban Economics, Elsevier, vol. 49(1), pages 54-79, January.
    7. Brueckner, Jan K & Follain, James R, 1988. "The Rise and Fall of the ARM: An Econometric Analysis of Mortgage Choice," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 93-102, February.
    8. James B. Kau & Taewon Kim, 1994. "Waiting to Default: The Value of Delay," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(3), pages 539-551.
    9. Han, Aaron & Hausman, Jerry A, 1990. "Flexible Parametric Estimation of Duration and Competing Risk Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(1), pages 1-28, January-M.
    10. Calhoun, Charles A & Deng, Yongheng, 2002. "A Dynamic Analysis of Fixed- and Adjustable-Rate Mortgage Terminations," The Journal of Real Estate Finance and Economics, Springer, vol. 24(1-2), pages 9-33, Jan.-Marc.
    11. Sa-Aadu, J & Sirmans, C F, 1989. "The Pricing of Adjustable Rate Mortgage Contracts," The Journal of Real Estate Finance and Economics, Springer, vol. 2(4), pages 253-266, December.
    12. Richard K. Green & James D. Shilling, 1997. "The Impact of Initial-Year Discounts on ARM Prepayments," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 373-385.
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    Cited by:

    1. 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.
    2. 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.
    3. repec:eee:apmaco:v:270:y:2015:i:c:p:714-723 is not listed on IDEAS

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