Optimal Life Cycle Portfolio Choice with Housing Market Cycles

Review of Financial Studies 26(9), 2311-2352

56 Pages Posted: 21 Nov 2010 Last revised: 12 Aug 2013

See all articles by Marcel Fischer

Marcel Fischer

Copenhagen Business School

Michael Z. Stamos

Allianz Global Investors

Date Written: February 2013

Abstract

In recent decades U.S. households have experienced residential house prices moving persistently, that is, returns being positively serially correlated. We set up a realistically calibrated life cycle model with slow-moving time variation in expected housing returns, showing that not only age, labor income, and pre-existing housing wealth but also the state of the housing market significantly affect household decisions. Consistently with the data, the model predicts that in good states of housing market cycles (1) homeownership rates increase, (2) households buying homes invest a larger share of their net worth in their home, and (3) these households lever up more.

Keywords: asset allocation, portfolio choice, housing market cycles, real estate

JEL Classification: G11, D91

Suggested Citation

Fischer, Marcel and Stamos, Michael Z., Optimal Life Cycle Portfolio Choice with Housing Market Cycles (February 2013). Review of Financial Studies 26(9), 2311-2352. Available at SSRN: https://ssrn.com/abstract=1712285 or http://dx.doi.org/10.2139/ssrn.1712285

Marcel Fischer (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45-3815-3628 (Phone)

Michael Z. Stamos

Allianz Global Investors ( email )

Mainzer Landstrasse 11-13
Frankfurt, 60329
Germany

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