IDEAS home Printed from https://ideas.repec.org/p/hhs/sifrwp/0044.html
   My bibliography  Save this paper

Life-Cycle Housing and Portfolio Choice with Bond Markets

Author

Listed:
  • van Hemert, Otto

    (NYU Stern)

Abstract

I study optimal housing and portfolio choice under stochastic inflation and real interest rates. Renters allocate financial wealth to stocks and bonds with different maturities. Homeowners also choose the mortgage type. I show that hedge demands and financial constraints vary over an investor's lifetime, giving rise to a pronounced life-cycle pattern in the optimal housing, stock, bond, and mortgage choice. Young homeowners take an adjustable-rate mortgage (ARM) and invest financial wealth predominantly in stocks. Later in the life cycle bonds play an important role, mainly as a hedge against changing real interest rates and house prices. Fairly risk-tolerant homeowners still prefer an ARM, while more risk-averse investors rather choose a combination of an ARM and a fixed-rate mortgage.

Suggested Citation

  • van Hemert, Otto, 2006. "Life-Cycle Housing and Portfolio Choice with Bond Markets," SIFR Research Report Series 44, Institute for Financial Research.
    • Handle: RePEc:hhs:sifrwp:0044
    as

    Download full text from publisher

    File URL: http://www.sifr.org/PDFs/sifr-wp44.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kaplan, Steven N. & Sensoy, Berk A. & Strömberg, Per, 2005. "What are Firms? Evolution from Birth to Public Companies," SIFR Research Report Series 36, Institute for Financial Research.
    2. Massimo Massa & Andrei Simonov, 2006. "Hedging, Familiarity and Portfolio Choice," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 633-685.
    3. Massa, Massimo & Simonov, Andrei, 2003. "Reputation and interdealer trading: a microstructure analysis of the Treasury Bond market," Journal of Financial Markets, Elsevier, vol. 6(2), pages 99-141, April.
    4. Kaplan, Steven & Strömberg, Per, 2002. "Characteristics, Contracts and Actions: Evidence from Venture Capitalist Analyses," CEPR Discussion Papers 3243, C.E.P.R. Discussion Papers.
    5. Bansal, Ravi & Dahlquist, Magnus & Harvey, Campbell R., 2004. "Dynamic Trading Strategies and Portfolio Choice," SIFR Research Report Series 31, Institute for Financial Research.
    6. Bortolotti, Bernardo & de Jong, Frank & Nicodano, Giovanna & Schindele, Ibolya, 2007. "Privatization and stock market liquidity," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 297-316, February.
    7. Donald P. Morgan & Bertrand Rime & Philip E. Strahan, 2004. "Bank Integration and State Business Cycles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(4), pages 1555-1584.
    8. Donald Morgan & Bertrand Rime & Philip Strahan, 2003. "Bank Integration and State Business Cycles," NBER Working Papers 9704, National Bureau of Economic Research, Inc.
    9. Sundaram, Rangarajan K. & Yermack, David, 2006. "Pay Me Later: Inside Debt and Its Role in Managerial Compensation," SIFR Research Report Series 43, Institute for Financial Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009. "Mortgage timing," Journal of Financial Economics, Elsevier, vol. 93(2), pages 292-324, August.
    2. Koijen, R.S.J., 2008. "Essays on asset pricing," Other publications TiSEM 75662994-29dc-4a83-a3ff-9, Tilburg University, School of Economics and Management.
    3. Chen, Xi, 2018. "Optimal life cycle mortgage and portfolio choices in the presence of the affordability constraint," Journal of Housing Economics, Elsevier, vol. 39(C), pages 1-16.
    4. Sumit Agarwal & Brent W. Ambrose, 2008. "Does it pay to read your junk mail? evidence of the effect of advertising on home equity credit choices," Working Paper Series WP-08-09, Federal Reserve Bank of Chicago.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ulf Axelson & Sandeep Baliga, 2009. "Liquidity and Manipulation of Executive Compensation Schemes," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3907-3939, October.
    2. Ulf Axelson & Per Strömberg & Michael S. Weisbach, 2009. "Why Are Buyouts Levered? The Financial Structure of Private Equity Funds," Journal of Finance, American Finance Association, vol. 64(4), pages 1549-1582, August.
    3. Fedyk, Yuriy & Walden, Johan, 2007. "High-Speed Natural Selection in Financial Markets with Large State Spaces," SIFR Research Report Series 52, Institute for Financial Research.
    4. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2008. "Arbitrage in the foreign exchange market: Turning on the microscope," Journal of International Economics, Elsevier, vol. 76(2), pages 237-253, December.
    5. Bjönnes, Geir H. & Holden, Steinar & Rime, Dagfinn & Solheim, Haakon O.Aa., 2005. "'Large' vs. 'Small' Players: A Closer Look at the Dynamics of Speculative Attacks," SIFR Research Report Series 38, Institute for Financial Research.
    6. Benjamin E. Hermalin & Michael S. Weisbach, 2012. "Information Disclosure and Corporate Governance," Journal of Finance, American Finance Association, vol. 67(1), pages 195-234, February.
    7. Rydqvist, Kristian, 2010. "Tax Arbitrage with Risk and Effort Aversion - Swedish Lottery Bonds 1970-1990," SIFR Research Report Series 70, Institute for Financial Research.
    8. Dreber, Anna & Rand, David G. & Garcia, Justin R. & Wernerfelt, Nils & Lum, J. Koji & Zeckhauser, Richard, 2010. "Dopamine and Risk Preferences in Different Domains," Working Paper Series rwp10-012, Harvard University, John F. Kennedy School of Government.
    9. Anderson, Anders E.S., 2004. "All Guts, No Glory: Trading and Diversification among Online Investors," SIFR Research Report Series 25, Institute for Financial Research.
    10. Philip E. Strahan, 2006. "Bank diversification, economic diversification?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue may12.
    11. Linda S Goldberg, 2009. "Understanding Banking Sector Globalization," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 171-197, April.
    12. Jonathon Adams‐Kane & Julián A. Caballero & Jamus Jerome Lim, 2017. "Foreign Bank Behavior during Financial Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 351-392, March.
    13. Goetz, Martin R. & Laeven, Luc & Levine, Ross, 2016. "Does the geographic expansion of banks reduce risk?," Journal of Financial Economics, Elsevier, vol. 120(2), pages 346-362.
    14. Sebnem Kalemli-Ozcan & Elias Papaioannou & José-Luis Peydró, 2013. "Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity," Journal of Finance, American Finance Association, vol. 68(3), pages 1179-1228, June.
    15. Smolyansky, Michael, 2019. "Policy externalities and banking integration," Journal of Financial Economics, Elsevier, vol. 132(3), pages 118-139.
    16. Fricke, Daniel & Roukny, Tarik, 2020. "Generalists and specialists in the credit market," Journal of Banking & Finance, Elsevier, vol. 112(C).
    17. Kyunghun Kim & Ju Hyun Pyun & Jiyoun An, 2017. "Does Credit Market Integration Amplify the Transmission of Real Business Cycle During Financial Crisis?," 2017 Meeting Papers 1236, Society for Economic Dynamics.
    18. Jarko Fidrmuc & Johann Scharler, 2013. "Financial development and the magnitude of business cycle fluctuations in OECD countries," Applied Economics Letters, Taylor & Francis Journals, vol. 20(6), pages 530-533, April.
    19. Hannes Böhm & Julia Schaumburg & Lena Tonzer, 2022. "Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(4), pages 698-734, December.
    20. Michalski, Tomasz & Ors, Evren, 2012. "(Interstate) Banking and (interstate) trade: Does real integration follow financial integration?," Journal of Financial Economics, Elsevier, vol. 104(1), pages 89-117.

    More about this item

    Keywords

    Portfolio choice; mortgage; housing; term structure of interest rates;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:sifrwp:0044. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anki Helmer (email available below). General contact details of provider: https://edirc.repec.org/data/sifrrse.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.