European Business Schools Librarian's Group
IESE Research Papers,
IESE Business School
No D/948: Optimal portfolio choice with predictability in house prices and transaction costs
Stefano Corradin, Jose L. Fillat and Carles Vergara ()
Additional contact information
Stefano Corradin: European Central Bank
Jose L. Fillat: Federal Reserve Bank of Boston
Carles Vergara: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Abstract: Are housing returns predictable? If so, do households take them into account when making their housing consumption and portfolio decisions? We document the existence of housing return predictability in the U.S. at the aggregate, census region, and state level. We study a portfolio choice model in which housing returns are predictable and adjustment costs must be paid when a house is purchased or sold. We show that two state variables affect the agent's decisions: 1) her wealth-to-housing ratio; and 2) the time-varying expected growth rate of house prices. The agent buys (sells) her housing assets only when the wealth-to-housing ratio reaches an optimal upper (lower) bound. These bounds are time-varying and depend on the expected growth rate of house prices. Finally, we use household level data from the PSID and SIPP surveys to test and support the model's main implications.
Keywords: Portfolio choice; predictability; house prices; household finance
96 pages, February 3, 2012
Full text files
DI-0948-E.pdf
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