Optimal Consumption and Investment with Cointegrated Stock and Housing Markets

47 Pages Posted: 2 Dec 2020

See all articles by Yingshan Chen

Yingshan Chen

National University of Singapore (NUS) - Department of Mathematics

Min Dai

The Hong Kong Polytechnic University

Shan Huang

Georgia Institute of Technology

Hong Liu

Washington University in St. Louis - Olin Business School; Fudan University - China Institute of Economics and Finance

Date Written: October 18, 2020

Abstract

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

Chen, Yingshan and Dai, Min and Huang, Shan and Liu, Hong, Optimal Consumption and Investment with Cointegrated Stock and Housing Markets (October 18, 2020). Available at SSRN: https://ssrn.com/abstract=3714296 or http://dx.doi.org/10.2139/ssrn.3714296

Yingshan Chen

National University of Singapore (NUS) - Department of Mathematics ( email )

10 Kent Ridge Crescent
Singapore, 119260
Singapore

Min Dai (Contact Author)

The Hong Kong Polytechnic University ( email )

Shan Huang

Georgia Institute of Technology ( email )

800 W Peachtree St NW
ATLANTA, GA 30308
United States

Hong Liu

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5883 (Phone)

Fudan University - China Institute of Economics and Finance ( email )

China

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