Working Paper: NBER ID: w12036
Authors: Monika Piazzesi; Martin Schneider; Selale Tuzel
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.
Keywords: Housing; Asset Pricing; Consumption
JEL Codes: G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| explicit modeling of housing as both an asset and a consumption good (R21) | alters the dynamics of asset pricing (G19) |
| composition risk (A30) | low-frequency movements in stock prices (G17) |
| housing share (R21) | excess stock returns (G12) |
| composition risk (A30) | stock prices drop significantly during severe recessions (E44) |
| low housing shares (R21) | additional downward pressure on stock prices (G19) |
| model predictions (C59) | lower risk-free rate compared to standard CCAPM (G19) |
| standard financial indicators (G32) | useful in forecasting excess stock returns (G17) |
| expenditure share on housing (R21) | predictive power for excess stock returns (G17) |