EconPapers    
Economics at your fingertips  
 

Optimal portfolio choice with predictability in house prices and transaction costs

Stefano Corradin (), Jose Fillat and Carles Vergara-Alert

No 1470, Working Paper Series from European Central Bank

Abstract: We generalize the classic Grossman and Laroque (1990) (GL) model of optimal portfolio choice with housing and transaction costs by introducing predictability in house prices. As in the GL model, agents only move to more expensive (cheaper) houses when their wealth-to-housing ratios reach an optimal lower (upper) boundary. However, in our model, these boundaries are time-varying and depend on the dynamics of the expected growth rate of house prices. We find that households moving to a more expensive house in periods of high expected growth in house prices have significantly lower ex-ante wealth-to-housing ratios than those moving in periods of low expected growth. We also find that the share of wealth invested in risky assets is lower during periods of high expected growth in house prices and that it is higher right before moving during periods of low growth. The main implications of the model are robust to tests using household level data from the PSID and SIPP surveys. JEL Classification: G11, D11, D91, C61

Keywords: durable goods; housing returns predictability; optimal housing consumption and investment; transaction costs (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-ure
Note: 1103497
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1470.pdf (application/pdf)

Related works:
Journal Article: Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs (2014) Downloads
Working Paper: Optimal portfolio choice with predictability in house prices and transaction costs (2012) Downloads
Working Paper: Optimal portfolio choice with predictability in house prices and transaction costs (2010) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20121470

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().

 
Page updated 2025-03-19
Handle: RePEc:ecb:ecbwps:20121470