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Can Housing Collateral Explain Long-Run Swings in Asset Returns?

Author

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  • Hanno Lustig
  • Stijn Van Nieuwerburgh

Abstract

To explain the low-frequency variation in US equity and debt returns in the 20th century, we solve an equilibrium model in which households face housing collateral constraints. An increase in the ratio of housing to human wealth loosens these borrowing constraintsthus allowing for more risk sharing. The rate of return that households require for holding equity decreases as a result. Feeding the historical time series of US housing collateral into the model replicates four features of long-run asset returns. (1) It produces a fifteen percent equity premium during the 1930s and a slow decline of the equity premium from eleven percent in the 1960s to four percent in 2003. (2) It generates large unexpected capital gains for equity holders, especially in the 1990s. (3) The risk-free rate and the housing collateral ratio are strongly positively correlated at low frequencies. (4) The model mimics the slow decline in the volatility of stock returns and the riskless interest rate.

Suggested Citation

  • Hanno Lustig & Stijn Van Nieuwerburgh, 2006. "Can Housing Collateral Explain Long-Run Swings in Asset Returns?," NBER Working Papers 12766, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:12766
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    File URL: http://www.nber.org/papers/w12766.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ralph S.J. Koijen & Stijn Van Nieuwerburgh, 2011. "Predictability of Returns and Cash Flows," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 467-491, December.
    2. Gete, Pedro, 2015. "Housing demands, savings gluts and current account dynamics," Globalization Institute Working Papers 221, Federal Reserve Bank of Dallas, revised 01 Aug 2015.
    3. 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.
    4. Jan Rouwendal, 2009. "Housing Wealth and Household Portfolios in an Ageing Society," De Economist, Springer, vol. 157(1), pages 1-48, March.
    5. Favilukis, Jack, 2013. "Inequality, stock market participation, and the equity premium," Journal of Financial Economics, Elsevier, vol. 107(3), pages 740-759.
    6. Stijn Van Nieuwerburgh & Pierre-Olivier Weill, 2010. "Why Has House Price Dispersion Gone Up?," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1567-1606.
    7. Kajuth, Florian, 2010. "The role of liquidity constraints in the response of monetary policy to house prices," Journal of Financial Stability, Elsevier, vol. 6(4), pages 230-242, December.
    8. MeiChi Huang, 2013. "The Role of People’s Expectation in the Recent US Housing Boom and Bust," The Journal of Real Estate Finance and Economics, Springer, vol. 46(3), pages 452-479, April.
    9. 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.
    10. Walentin Karl, 2010. "Earnings Inequality and the Equity Premium," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-23, November.
    11. Stijn Van Nieuwerburgh, 2012. "The Research Agenda: Stijn Van Nieuwerburgh on Housing and the Macroeconomy," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 13(2), April.
    12. James A. Kahn, 2008. "What drives housing prices?," Staff Reports 345, Federal Reserve Bank of New York.
    13. Sydney Ludvigson, 2007. "Housing, credit and consumer expenditure: commentary," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 335-350.
    14. Davis, Morris A., 2009. "The price and quantity of land by legal form of organization in the United States," Regional Science and Urban Economics, Elsevier, vol. 39(3), pages 350-359, May.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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