Housing Risk and the Cross-Section of Returns Across Many Asset Classes

Fisher College of Business Working Paper No. 2020-03-008

Charles A. Dice Working Paper No. 2020-08

55 Pages Posted: 10 May 2020

See all articles by Sai Ma

Sai Ma

Board of Governors of the Federal Reserve System

Shaojun Zhang

The Ohio State University; The Vanguard Group, Inc.

Date Written: May 7, 2020

Abstract

When households consume both nondurable goods and housing services, external habit preference over nondurable consumption generates procyclical demand for housing. Marginal utility falls when housing demand rises and innovations to housing demand arise as a risk factor. Motivated by theory, we use shocks to the ratio of residential-to-aggregate investment to capture the housing demand risk. The single-factor model exhibits strong explanatory power for expected returns across various equity characteristic-sorted portfolios and non-equity asset classes with positive risk price estimates that are similar in magnitude. The model is robust to controlling for other factor models based on durable consumption, financial intermediaries, household heterogeneity, and return-based multifactor models designed to price these assets.

Keywords: asset classes, cross section, risk, housing, demand shocks

JEL Classification: G10, G11, G12

Suggested Citation

Ma, Sai and Zhang, Shaojun, Housing Risk and the Cross-Section of Returns Across Many Asset Classes (May 7, 2020). Fisher College of Business Working Paper No. 2020-03-008, Charles A. Dice Working Paper No. 2020-08, Available at SSRN: https://ssrn.com/abstract=3595662 or http://dx.doi.org/10.2139/ssrn.3595662

Sai Ma

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2870 (Phone)

HOME PAGE: http://saimaecon.com

Shaojun Zhang (Contact Author)

The Ohio State University

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://sites.google.com/view/zhangshaojun

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

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