Housing, Consumption, and Asset Pricing

56 Pages Posted: 4 May 2006 Last revised: 2 Jul 2009

See all articles by Monika Piazzesi

Monika Piazzesi

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Martin Schneider

Stanford University

Martin Schneider

Independent

Selale Tuzel

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: February 2006

Abstract

This paper considers a consumption-based asset pricing model where housing is explicitly modeled both as an asset and as a consumption good. Nonseparable preferences describe households' concern with composition risk, that is, fluctuations in the relative share of housing in their consumption basket. Since the housing share moves slowly, a concern with composition risk induces low frequency movements in stock prices that are not driven by news about cash flow. Moreover, the model predicts that the housing share can be used to forecast excess returns on stocks. We document that this indeed true in the data. The presence of composition risk also implies that the riskless rate is low which further helps the model improve on the standard CCAPM.

Suggested Citation

Piazzesi, Monika and Schneider, Martin and Schneider, Martin and Tuzel, Selale, Housing, Consumption, and Asset Pricing (February 2006). NBER Working Paper No. w12036. Available at SSRN: https://ssrn.com/abstract=883085

Monika Piazzesi (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Martin Schneider

Stanford University ( email )

Stanford, CA 94305
United States

Martin Schneider

Independent ( email )

No Address Available
United States

Selale Tuzel

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

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