Working Paper: NBER ID: w12766
Authors: Hanno Lustig; Stijn Van Nieuwerburgh
Abstract: To explain the low-frequency variation in US equity and debt returns in the 20th century, we solve an equilibrium model in which households face housing collateral constraints. An increase in the ratio of housing to human wealth loosens these borrowing constraintsthus allowing for more risk sharing. The rate of return that households require for holding equity decreases as a result. Feeding the historical time series of US housing collateral into the model replicates four features of long-run asset returns. (1) It produces a fifteen percent equity premium during the 1930s and a slow decline of the equity premium from eleven percent in the 1960s to four percent in 2003. (2) It generates large unexpected capital gains for equity holders, especially in the 1990s. (3) The risk-free rate and the housing collateral ratio are strongly positively correlated at low frequencies. (4) The model mimics the slow decline in the volatility of stock returns and the riskless interest rate.
Keywords: No keywords provided
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Housing collateral (R31) | Risk sharing (D16) |
| Risk sharing (D16) | Equity premium (G19) |
| Increase in the ratio of housing to human wealth (R21) | Borrowing constraints loosen (H74) |
| Borrowing constraints loosen (H74) | Required returns on equity decrease (G12) |
| Collateral scarcity in the 1930s (N13) | High equity premium (G19) |
| Increased housing collateral availability (R31) | Declining equity premium over time (D15) |
| Increased housing collateral (R31) | Large unexpected capital gains for equity holders (G19) |
| Housing collateral ratio (R31) | Risk-free rate (G19) |
| Periods of low collateral (G33) | Lower interest rates (E43) |