Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perspective
Hanno N. Lustig
UCLA - Anderson School of Management; National Bureau of Economic Research (NBER)
Stijn Van Nieuwerburgh
New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
NYU Working Paper No. S-MF-04-02
In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. Using aggregate data for the US, we find that a decrease in the ratio of housing wealth to human wealth predicts higher returns on stocks. Conditional on this ratio, the covariance of returns with aggregate risk factors explains eighty percent of the cross-sectional variation in annual size and book-to-market portfolio returns.
Number of Pages in PDF File: 58
Keywords: Asset Pricing, Risk Sharingworking papers series
Date posted: November 12, 2008
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