Are Household Portfolios Efficient? An Analysis Conditional on Housing
In this paper we argue that standard tests of portfolio efficiency are biased because they neglect the existence of illiquid wealth. In the case of household portfolios, the most important illiquid asset is housing: if housing stock adjustments are costly and therefore infrequent, we show how the dynamic optimization problem produces optimal portfolios in periods of no adjustment that are affected by housing price risk (through a hedge term). When the housing stock is not adjusted, we argue that tests for portfolio efficiency of financial assets must then be run conditionally upon housing wealth. In our application, we use Italian household portfolio data from SHIW 1998 and time series data on financial asset and housing stock returns to assess whether actual portfolios are efficient. We first consider purely financial portfolios and portfolios that also treat the housing stock as another asset. We then consider the consequences of treating the housing stock as given and test for efficiency in this framework. Our empirical results support the view that the presence of housing wealth plays an important role in determining whether portfolios chosen by home-owners are efficient.
|Date of creation:||Jun 2006|
|Contact details of provider:|| Postal: via del Santo, 33 - 35122 Padova|
Phone: +39 +49 8274210
Fax: +39 +49 827.4211
Web page: http://www.decon.unipd.it/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sanford J Grossman & Guy Laroque, 2003.
"Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods,"
Levine's Working Paper Archive
618897000000000803, David K. Levine.
- Grossman, Sanford J & Laroque, Guy, 1990. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Econometrica, Econometric Society, vol. 58(1), pages 25-51, January.
- Sanford J. Grossman & Guy Laroque, 1987. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," NBER Working Papers 2369, National Bureau of Economic Research, Inc.
- Marjorie Flavin & Shinobu Nakagawa, 2004. "A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence," NBER Working Papers 10458, National Bureau of Economic Research, Inc.
- Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
- Mayers, David, 1973. "Nonmarketable Assets and the Determination of Capital Asset Prices in the Absence of a Riskless Asset," The Journal of Business, University of Chicago Press, vol. 46(2), pages 258-267, April.
- Loriana Pelizzon & Guglielmo Weber, 2006.
"Are Household Portfolios Efficient? An Analysis Conditional on Housing,"
"Marco Fanno" Working Papers
0021, Dipartimento di Scienze Economiche "Marco Fanno".
- Pelizzon, Loriana & Weber, Guglielmo, 2008. "Are Household Portfolios Efficient? an Analysis Conditional on Housing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(02), pages 401-431, June.
- Pelizzon, Loriana & Weber, Guglielmo, 2003. "Are Household Portfolios Efficient? An Analysis Conditional on Housing," CEPR Discussion Papers 3890, C.E.P.R. Discussion Papers.
- Loriana Pelizzon & Guglielmo Weber, 2006. "Are Household Portfolios Efficient? An Analysis Conditional on Housing," Working Papers 2006_55, Department of Economics, University of Venice "Ca' Foscari".
- Luigi Guiso & Tullio Jappelli, 2000.
"Household Portfolios in Italy,"
CSEF Working Papers
43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Goetzmann, William Nelson, 1993.
"The Single Family Home in the Investment Portfolio,"
The Journal of Real Estate Finance and Economics,
Springer, vol. 6(3), pages 201-222, May.
- Goetzmann, W.N., 1990. "The Single Family Home In The Investment Portfolio," Papers fb-_90-15, Columbia - Graduate School of Business.
- John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
- Jobson, J. D. & Korkie, Bob, 1982. "Potential performance and tests of portfolio efficiency," Journal of Financial Economics, Elsevier, vol. 10(4), pages 433-466, December.
- Cauley, Stephen D & Pavlov, Andrey D. & Schwartz, Eduardo S, 2005. "Homeownership as a Constraint on Asset Allocation," University of California at Los Angeles, Anderson Graduate School of Management qt7kg2p8nm, Anderson Graduate School of Management, UCLA.
- Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-278, July.
- David le Blanc & Christine Lagarenne, 2004. "Owner-Occupied Housing and the Composition of the Household Portfolio: The Case of France," The Journal of Real Estate Finance and Economics, Springer, vol. 29(3), pages 259-275, November.
- de Roon, Frans & Eichholtz, Piet & Koedijk, Kees, 2002. "The Portfolio Implications of Home Ownership," CEPR Discussion Papers 3501, C.E.P.R. Discussion Papers.
- Gourieroux, C. & Jouneau, F., 1999. "Econometrics of efficient fitted portfolios," Journal of Empirical Finance, Elsevier, vol. 6(1), pages 87-118, January.
- Blake, David, 1996. "Efficiency, Risk Aversion and Portfolio Insurance: An Analysis of Financial Asset Portfolios Held by Investors in the United Kingdom," Economic Journal, Royal Economic Society, vol. 106(438), pages 1175-1192, September.
- Ross, Stephen A & Zisler, Randall C, 1991. "Risk and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 175-190, June.
- Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
- Yamashita, Takashi, 2003. "Owner-occupied housing and investment in stocks: an empirical test," Journal of Urban Economics, Elsevier, vol. 53(2), pages 220-237, March.
- Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
- William N. Goetzmann & Roger G. Ibbotson, 1990. "The Performance Of Real Estate As An Asset Class," Journal of Applied Corporate Finance, Morgan Stanley, vol. 3(1), pages 65-76.
- Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
When requesting a correction, please mention this item's handle: RePEc:pad:wpaper:0021. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Raffaele Dei Campielisi)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.