Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs

36 Pages Posted: 14 Feb 2009 Last revised: 20 Nov 2009

Stefano Corradin

European Central Bank (ECB)

Jose L. Fillat

Federal Reserve Banks - Federal Reserve Bank of Boston

Carles Vergara-Alert

University of Navarra - IESE Business School

Multiple version iconThere are 4 versions of this paper

Date Written: 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.

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

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

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: https://ssrn.com/abstract=1342755 or http://dx.doi.org/10.2139/ssrn.1342755

Stefano Corradin

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
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)

University of Navarra - 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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