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American Economic Review: Vol. 101 No. 3 (May 2011)

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Owner-Occupied Housing: Life-Cycle Implications for the Household Portfolio

Article Citation

Flavin, Marjorie, and Takashi Yamashita. 2011. "Owner-Occupied Housing: Life-Cycle Implications for the Household Portfolio." American Economic Review, 101(3): 609-14.

DOI: 10.1257/aer.101.3.609

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.

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Authors

Flavin, Marjorie (U CA, San Diego)
Yamashita, Takashi (Nova Southeastern U)

JEL Classifications

D14: Personal Finance
D91: Intertemporal Consumer Choice; Life Cycle Models and Saving
G11: Portfolio Choice; Investment Decisions
R31: Housing Supply and Markets


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