Owner-Occupied Housing and the Composition of the Household Portfolio: The Case of France

Abstract

This paper investigates the impact of housing demand on the composition of the optimal portfolios of homeowners in France, following the methodology developed by Flavin and Yamashita (2002). We use historical data on housing prices and financial assets returns to estimate the mean return and covariance matrix of a set of assets including housing. We then calculate mean-variance efficient frontiers associated to various levels of the housing-to-net wealth ratio, corresponding to the average ratios observed for different age groups in the 1998 French Wealth Survey sample. Our numerical results fit the average portfolios in different age brackets quite well. Also, returns of housing and its covariance with the other assets indicate there is room in France for housing price derivatives.

Keywords: housing price derivatives, mean-variance portfolio, efficient frontiers, homeownership

JEL Classification: E2, G1