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Efficient Portfolios when Housing Needs Change over the Life-Cycle

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  • Loriana Pelizzon

    () (Department of Economics, University Of Venice C� Foscari)

  • Guglielmo Weber

    (Department of Economics, University of Padua)

Abstract

We address the issue of the efficiency of household portfolios in the presence of housing risk. We treat housing stock as an asset and rents as a stochastic liability stream: over the life-cycle, households can be short or long in their net housing position. Efficient financial portfolios are the sum of a standard Markowitz portfolio and a housing risk hedge term that multiplies net housing wealth. Our empirical results show that net housing plays a key role in determining which household portfolios are inefficient. The largest proportion of inefficient portfolios obtains among those with positive net housing, who should invest more in stocks.

Suggested Citation

  • Loriana Pelizzon & Guglielmo Weber, 2007. "Efficient Portfolios when Housing Needs Change over the Life-Cycle," Working Papers 2007_31, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2007_31
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    Cited by:

    1. Becker, Sascha O. & Hoffmann, Mathias, 2010. "Equity fund ownership and the cross-regional diversification of household risk," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 90-102, January.
    2. Alghalith, Moawia, 2012. "The impact of background risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6506-6508.
    3. Otto Van Hemert, 2010. "Household Interest Rate Risk Management," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 38(3), pages 467-505.
    4. Jan Rouwendal, 2009. "Housing Wealth and Household Portfolios in an Ageing Society," De Economist, Springer, vol. 157(1), pages 1-48, March.
    5. Muck, Matthias, 2010. "Trading strategies with partial access to the derivatives market," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1288-1298, June.
    6. Marekwica, Marcel & Schaefer, Alexander & Sebastian, Steffen, 2013. "Life cycle asset allocation in the presence of housing and tax-deferred investing," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1110-1125.
    7. Horneff, Wolfram & Maurer, Raimond & Rogalla, Ralph, 2010. "Dynamic portfolio choice with deferred annuities," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2652-2664, November.
    8. Roel Beetsma & Alessandro Bucciol, 2011. "Differentiating Indexation in Dutch Pension Funds," De Economist, Springer, vol. 159(3), pages 323-360, September.
    9. Moawia Alghalith & Xu Guo & Wing-Keung Wong & Lixing Zhu, 2016. "A General Optimal Investment Model In The Presence Of Background Risk," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-8, March.
    10. Pelizzon, Loriana & Weber, Guglielmo, 2009. "Efficient portfolios when housing needs change over the life cycle," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2110-2121, November.
    11. Alessandro Bucciol & Raffaele Miniaci, 2011. "Household Portfolios and Implicit Risk Preference," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1235-1250, November.
    12. Raun Ooijen & Rob Alessie & Adriaan Kalwij, 2015. "Saving Behavior and Portfolio Choice After Retirement," De Economist, Springer, vol. 163(3), pages 353-404, September.
    13. Jiang, Chonghui & Ma, Yongkai & An, Yunbi, 2010. "An analysis of portfolio selection with background risk," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3055-3060, December.
    14. Riccardo Calcagno & Maria Cesira Urzi Brancati, 2014. "Do more financially literate households invest less in housing? Evidence from Italy," Economics Bulletin, AccessEcon, vol. 34(1), pages 430-445.
    15. Christelis, Dimitris & Georgarakos, Dimitris & Haliassos, Michael, 2011. "Stockholding: Participation, location, and spillovers," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1918-1930, August.
    16. Veld-Merkoulova, Yulia V., 2011. "Investment horizon and portfolio choice of private investors," International Review of Financial Analysis, Elsevier, vol. 20(2), pages 68-75, April.
    17. Raffaele Miniaci & Sergio Pastorello, 2010. "Mean-variance econometric analysis of household portfolios," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(3), pages 481-504.
    18. Xu, Guo & Wing-Keung, Wong & Lixing, Zhu, 2013. "Comparisons and Characterizations of the Mean-Variance, Mean-VaR, Mean-CVaR Models for Portfolio Selection With Background Risk," MPRA Paper 51827, University Library of Munich, Germany.

    More about this item

    Keywords

    Housing and portfolio choice; Portfolio efficiency; Rental risk; Life-cycle.;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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