Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs

80 Pages Posted: 24 Sep 2012

See all articles by Stefano Corradin

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: September 18, 2012

Abstract

We generalize the classic Grossman and Laroque (1990) (GL) model of optimal portfolio choice with housing and transaction costs by introducing predictability in house prices. As in the GL model, agents only move to more expensive (cheaper) houses when their wealth-to-housing ratios reach an optimal lower (upper) boundary. However, in our model, these boundaries are time-varying and depend on the dynamics of the expected growth rate of house prices. We find that households moving to a more expensive house in periods of high expected growth in house prices have significantly lower ex-ante wealth-to-housing ratios than those moving in periods of low expected growth. We also find that the share of wealth invested in risky assets is lower during periods of high expected growth in house prices and that it is higher right before moving during periods of low growth. The main implications of the model are robust to tests using household level data from the PSID and SIPP surveys.

Keywords: durable goods, transaction costs, housing returns predictability, optimal housing consumption and investment

JEL Classification: G11, D11, D91, C61

Suggested Citation

Corradin, Stefano and Fillat, Jose L. and Vergara-Alert, Carles, Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs (September 18, 2012). ECB Working Paper No. 1470. Available at SSRN: https://ssrn.com/abstract=2148379

Stefano Corradin (Contact Author)

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

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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