Housing, Home Production, and the Equity and Value Premium Puzzles
Morris A. Davis
University of Wisconsin School of Business
Robert F. Martin
Federal Reserve Board - International Finance Division
June 24, 2008
FRB International Finance Discussion Paper No. 931
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, E22working papers series
Date posted: June 27, 2008
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