Housing, Consumption, and Asset Pricing / Monika Piazzesi, Martin Schneider, Selale Tuzel.

Format:

Book

Author/Creator:

Piazzesi, Monika.

Contributor:

Schneider, Martin.

Tuzel, Selale.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12036.

NBER working paper series no. w12036

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

This paper considers a consumption-based asset pricing model where housing is explicitly modeled both as an asset and as a consumption good. Nonseparable preferences describe households' concern with composition risk, that is, fluctuations in the relative share of housing in their consumption basket. Since the housing share moves slowly, a concern with composition risk induces low frequency movements in stock prices that are not driven by news about cash flow. Moreover, the model predicts that the housing share can be used to forecast excess returns on stocks. We document that this indeed true in the data. The presence of composition risk also implies that the riskless rate is low which further helps the model improve on the standard CCAPM.

Notes:

February 2006.

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