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American Economic Review Vol. 101 No. 3 2011

Owner-Occupied Housing: Life-Cycle Implications for the Household Portfolio

Marjorie Flavin1; Takashi Yamashita2

1 Economics Department, 0508, UCSD, 9500 Gilman Dr., La Jolla, CA 92093-0508. · 2 H. Wayne Huizenga School of Business and Entrepreneurship, Nova Southeastern University, 3301 College Ave., Fort Lauderdale, FL 33314-7796.

Abstract

The paper constructs a model of optimal portfolio allocation incorporating the role of housing as collateral. Current house value is a state variable in the portfolio decision due to a nonconvex adjustment cost. Holding risk aversion constant, the percentage of the portfolio held in stocks is decreasing in the ratio of house value to net wealth; thus an older household with a lower ratio of house value to net wealth will generally hold more its portfolio in stocks than younger households. Empirical results using the Survey of Consumer Finances confirm the quantitative and statistical significance of the housing state variable.

DOI
10.1257/aer.101.3.609
Volume
101
Issue
3
Pages
609-614
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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