Optimal Consumption and Investment with Cointegrated Stock and Housing Markets
47 Pages Posted: 2 Dec 2020
Date Written: October 18, 2020
The well-documented nonparticipation in the stock market by many households and the highly negative correlation between stock and housing investment are puzzling. We show that stock and housing markets are cointegrated, and thus households significantly increase housing expenditure, reduce stock investment, and may choose nonparticipation in the stock market at all if they face short-sale constraints. Our model can thus potentially help explain both the puzzle of stock market nonparticipation and the puzzle of the highly negative correlation between stock and housing investment. We also show some empirical evidence that is supportive of the model's main implications.
Keywords: Nonparticipation, cointegration, housing, stock investment
JEL Classification: E21, G11, G50
Suggested Citation: Suggested Citation