Owner-Occupied Housing: Life-Cycle Implications for the Household Portfolio
Marjorie Flavin, Takashi Yamashita
American Economic Review · 2011 · Volume 101 · Issue 3
Abstract
The paper constructs a model of optimal portfolio allocation incorporating the role of housing as collateral. Current house value is a state variable in the portfolio decision due to a nonconvex adjustment cost. Holding risk aversion constant, the percentage of the portfolio held in stocks is decreasing in the ratio of house value to net wealth; thus an older household with a lower ratio of house value to net wealth will generally hold more its portfolio in stocks than younger households. Empirical results using the Survey of Consumer Finances confirm the quantitative and statistical significance of the housing state variable.
Keywords
Personal Finance, Intertemporal Consumer Choice, Life Cycle Models and Saving, Portfolio Choice, Investment Decisions, Housing Supply and Markets
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