Abstract

http://ssrn.com/abstract=1342755
 
 

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Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs


Stefano Corradin


European Central Bank (ECB)

Jose L. Fillat


Federal Reserve Banks - Federal Reserve Bank of Boston

Carles Vergara-Alert


IESE Business School

February 14, 2009


Abstract:     
We study a model of portfolio choice with housing in which house price is predictable. Housing is illiquid in that a transaction cost must be paid when the house is sold. We show that two state variables aff ect the agent's decisions: (i) the wealth-house
ratio, and (ii) the time-varying mean rate of house price growth. The agent increases (decreases) his housing asset holding only when the wealth-house ratio reaches an optimal upper (lower) boundary. These boundaries are time-varying and will decrease (increase) when house prices are expected to rise (fall). Implications for portfolio rules and housing asset holding are examined. Finally, we use PSID data to test the implications of our model.

Number of Pages in PDF File: 36

Keywords: Portfolio Choice, Predictability, House Prices, Transaction Costs, Real Estate Bubbles

JEL Classification: G1, G11, C61, D11, R2, R20, R21

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Date posted: February 14, 2009 ; Last revised: November 20, 2009

Suggested Citation

Corradin, Stefano and Fillat, Jose L. and Vergara-Alert, Carles, Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs (February 14, 2009). Available at SSRN: http://ssrn.com/abstract=1342755 or http://dx.doi.org/10.2139/ssrn.1342755

Contact Information

Stefano Corradin
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
Jose L. Fillat
Federal Reserve Banks - Federal Reserve Bank of Boston ( email )
600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3342 (Phone)
617-5735445 (Fax)
HOME PAGE: http://www.bos.frb.org/economic/econbios/fillat.htm
Carles Vergara-Alert (Contact Author)
IESE Business School ( email )
Av. Pearson 21
Barcelona, 08034
Spain
+34 932544200 (Phone)
+34 932534343 (Fax)
HOME PAGE: http://web.iese.edu/cvergara/
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