Housing, Home Production, and the Equity and Value Premium Puzzles

36 Pages Posted: 27 Jun 2008

See all articles by Morris A. Davis

Morris A. Davis

Rutgers Business School

Robert F. Martin

Federal Reserve Board - International Finance Division

Date Written: June 24, 2008

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.

Keywords: elasticity of eubstitution, durable consumption, house prices

JEL Classification: G12, R21, E21, E22

Suggested Citation

Davis, Morris A. and Martin, Robert F., Housing, Home Production, and the Equity and Value Premium Puzzles (June 24, 2008). FRB International Finance Discussion Paper No. 931, Available at SSRN: https://ssrn.com/abstract=1150761 or http://dx.doi.org/10.2139/ssrn.1150761

Morris A. Davis (Contact Author)

Rutgers Business School ( email )

Rutgers Business School
One Washington Park #1092
Newark, NJ 07102
United States

Robert F. Martin

Federal Reserve Board - International Finance Division ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-872-7564 (Phone)
202-736-5638 (Fax)

HOME PAGE: http://www.rfmartin.com

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