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Portfolio Choice with Indivisible and Illiquid Housing Assets: The Case of Spain

Sergio Mayordomo (), María Rodríguez-Moreno () and Juan Ignacio Peña ()
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María Rodríguez-Moreno: European Central Bank
Juan Ignacio Peña: Department of Business Administration, Universidad Carlos III de Madrid

No 24/12, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: This paper presents a procedure for computing the theoretically optimal portfolio under the assumption that housing is an indivisible, illiquid asset that restricts the portfolio choice decision. The analysis also includes the financial constraints households may face when they apply for external funding. The set of financial assets that constitute the household's portfolios are bank time deposits, stocks, mortgage, and housing. We compare the theoretically optimal portfolio against Spanish household's actual choices using a unique data set, the Spanish Survey of Household Finance. In comparison with the optimal portfolio, households significantly underinvest in stocks and deposits. In the case of mortgages, the optimal and actual portfolios weights are not unequal. At a more disaggregated level, some additional differences emerge that are explained by demographic, educational, and income characteristics.

Keywords: Portfolio choice; Households; Indivisible illiquid assets; Financial constraints; Under-investment (search for similar items in EconPapers)
JEL-codes: C61 D14 G11 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2012-12-21
New Economics Papers: this item is included in nep-ure
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Journal Article: Portfolio choice with indivisible and illiquid housing assets: the case of Spain (2014) Downloads
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