A Theory of Housing Collateral, Consumption Insurance and Risk Premia

Hanno Lustig () and Stijn Van Nieuwerburgh

No 10955, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a model with housing collateral, a decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. This collateral mechanism can quantitatively replicate the conditional and the cross-sectional variation in risk premia on stocks for reasonable parameter values. The increase of the conditional equity premium and Sharpe ratio when collateral is scarce in the model matches the increase observed in US data. The model also generates a return spread of value firms over growth firms of the magnitude observed in the data, because the term structure of consumption strip risk premia is downward sloping.

JEL-codes: G0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fin, nep-ias and nep-ure
Date: 2004-12
Note: AP
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