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Housing, Home Production, and the Equity and Value Premium PuzzlesMorris A. DavisUniversity of Wisconsin School of Business Robert F. MartinFederal Reserve Board - International Finance Division June 24, 2008 FRB International Finance Discussion Paper No. 931 Abstract: We test if a standard representative agent model with a home-production sector can resolve the equity premium or value premium puzzles. In this model, agents value market consumption and a home consumption good that is produced as an aggregate of the stock of housing, home labor, and a labor-augmenting technology shock. We construct the unobserved quantity of the home consumption good by combining observed data with restrictions of the model. We test the first-order conditions of the model using GMM. The model is rejected by the data; it cannot explain either the historical equity premium or the value premium.
Number of Pages in PDF File: 36 Keywords: elasticity of eubstitution, durable consumption, house prices JEL Classification: G12, R21, E21, E22 working papers seriesDate posted: June 27, 2008Suggested CitationContact Information
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