Working Paper: CEPR ID: DP7842
Authors: Francois Ortalo-Magne; Andrea Prat
Abstract: People choose where to live and how much to invest in housing. Traditionally, the first decision has been the domain of spatial economics, while the second has been analyzed in finance. Spatial asset pricing is an attempt to combine equilibrium concepts from both disciplines. In the finance context, we show how spatial decisions can be framed as an expanded portfolio problem. Within spatial economics, we identify the consequences of hedging motives for location decisions. We characterize a number of observable deviations from standard predictions in dinance (e.g. the definition of the relevant market portfolio for the pricing of risk includes homeownership rates) and in spatial economics (e.g. hedging considerations and the pricing of risk affect the geographic allocation of human capital).
Keywords: Asset Pricing; Real Estate; Urban Economics
JEL Codes: G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| spatial allocation of households (R20) | local rents (R21) |
| local rents (R21) | pricing of real estate assets (R31) |
| pricing of real estate assets (R31) | spatial allocation of households (R20) |
| spatial allocation of households (R20) | pricing of real estate assets (R31) |
| homeownership rates (R21) | asset pricing (G19) |
| risk exposure (G22) | housing demand (R21) |
| housing demand (R21) | cross-sectional distribution of rents (D39) |