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Housing, home production, and the equity and value premium puzzles

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  • Morris A. Davis
  • Robert F. Martin

Abstract

We test if a standard representative agent model with a home-production sector can resolve the equity premium or value premium puzzles. In this model, agents value market consumption and a home consumption good that is produced as an aggregate of the stock of housing, home labor, and a labor-augmenting technology shock. We construct the unobserved quantity of the home consumption good by combining observed data with restrictions of the model. We test the first-order conditions of the model using GMM. The model is rejected by the data; it cannot explain either the historical equity premium or the value premium.

Suggested Citation

  • Morris A. Davis & Robert F. Martin, 2008. "Housing, home production, and the equity and value premium puzzles," International Finance Discussion Papers 931, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:931
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    7. Morris A. Davis & Francois Ortalo-Magne, 2011. "Household Expenditures, Wages, Rents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 248-261, April.
    8. David E. Lebow & Jeremy B. Rudd, 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand?," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 159-201, March.
    9. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
    10. Gomme, Paul & Rupert, Peter, 2007. "Theory, measurement and calibration of macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 460-497, March.
    11. 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.
    12. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, vol. 57(5), pages 1027-1057, September.
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    14. McGrattan, Ellen R & Rogerson, Richard & Wright, Randall, 1997. "An Equilibrium Model of the Business Cycle with Household Production and Fiscal Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 267-290, May.
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    Cited by:

    1. Gang-Zhi Fan & Ming Pu & Seow Ong, 2012. "Optimal Portfolio Choices, House Risk Hedging and the Pricing of Forward House Transactions," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 3-29, June.
    2. 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.
    3. Charles Ka Yui Leung & Joe Cho Yiu Ng & Edward Tang, 2020. "Why is the Hong Kong Housing Market Unaffordable? Some Stylized Facts and Estimations," Globalization Institute Working Papers 380, Federal Reserve Bank of Dallas.
    4. Leung, Charles Ka Yui, 2014. "Error correction dynamics of house prices: An equilibrium benchmark," Journal of Housing Economics, Elsevier, vol. 25(C), pages 75-95.
    5. Wenli Li & Haiyong Liu & Fang Yang & Rui Yao, 2016. "Housing Over Time And Over The Life Cycle: A Structural Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(4), pages 1237-1260, November.
    6. Davis, Morris A. & Van Nieuwerburgh, Stijn, 2015. "Housing, Finance, and the Macroeconomy," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 753-811, Elsevier.
    7. Nikola Kojucharov & Clyde F. Martin & Robert F. Martin & Lili Xu, 2009. "The subprime mortgage crisis: irrational exuberance or rational error?," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    8. Ivan Jaccard, 2010. "Asset Pricing and Housing Supply in a Production Economy," 2010 Meeting Papers 605, Society for Economic Dynamics.
    9. 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.
    10. 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.
    11. 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.
    12. Wenli Li & Fang Yang & Michael Dotsey, 2010. "Consumption and Home Production over the Life Cycle," 2010 Meeting Papers 423, Society for Economic Dynamics.
    13. Shin, Wonmun, 2022. "A New angle on excess consumption volatility in emerging countries: Does house price matter?," Journal of International Money and Finance, Elsevier, vol. 124(C).
    14. Fang Yang & Wenli Li & Haiyong Liu & Rui Yao, 2014. "Housing over Time and over the Life Cycle: A Structural Estimation," Departmental Working Papers 2014-12, Department of Economics, Louisiana State University.
    15. Yum K. Kwan & Jinyue Dong, 2014. "Stock Price Dynamics of China: What Do the Asset Markets Tell Us About the Chinese Utility Function?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(03), pages 77-108, May.

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    Keywords

    Housing - Finance; Housing - Prices; Consumption (Economics);
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