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
61 Pages Posted: 10 May 2020 Last revised: 13 Dec 2024
Date Written: May 7, 2020
Abstract
This paper documents that a single-factor model based on shocks to the residential investment share, or the ratio of residential-to-nonresidential investment, exhibits strong explanatory power for expected returns across various characteristic-sorted portfolios in equity and other asset classes. The residential investment share captures time-varying demand for housing services and is a state variable of the economy. Consequently, innovations to the share emerge as a risk factor in asset prices in the cross-section. The empirical results are 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: Suggested Citation