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Housing, Consumption, and Asset Pricing

  • Monika Piazzesi
  • Martin Schneider
  • Selale Tuzel

This paper considers a consumption-based asset pricing model where housing is explicitly modeled both as an asset and as a consumption good. Nonseparable preferences describe households' concern with composition risk, that is, fluctuations in the relative share of housing in their consumption basket. Since the housing share moves slowly, a concern with composition risk induces low frequency movements in stock prices that are not driven by news about cash flow. Moreover, the model predicts that the housing share can be used to forecast excess returns on stocks. We document that this indeed true in the data. The presence of composition risk also implies that the riskless rate is low which further helps the model improve on the standard CCAPM.

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File URL: http://www.nber.org/papers/w12036.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12036.

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Date of creation: Feb 2006
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Publication status: published as Piazzesi, Monika, Martin Schneider and Selale Tuzel. “Housing, Consumption, and Asset Pricing.” Journal of Financial Economics 83 (March 2007): 531-569.
Handle: RePEc:nbr:nberwo:12036
Note: AP EFG ME
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