Housing, Risk Aversion and Asset Prices

76 Pages Posted: 2 Feb 2017 Last revised: 29 Nov 2021

See all articles by Messaoud Chibane

Messaoud Chibane

Neoma Business School

Abraham Lioui

EDHEC Business School

Patrice Poncet

ESSEC Business School; Universite Paris I Pantheon Sorbonne

Date Written: November 28, 2017

Abstract

By extending Cumulant Generating Function-based pricing formulas to a two-good economy (non-housing and housing), we obtain closed-form solutions for asset prices. The presence of housing impacts risk aversion and induces time variation that is priced in the model. Since housing also brings about composition risk, we show that it introduces endogenously a long-run risk component into the consumption bundle dynamics. Estimating the model over the period 1959 -– 2020, we show that rare booms and busts events in housing expenditures is determinant in obtaining moderate housing risk premium and housing excess return volatility, both in line with empirical results. The real interest rate and both the level and volatility of the equity risk premium also fit the data owing to the presence of the COVID period into our sample period.

Keywords: Housing CCAPM, Rare Disaster Events, Cumulant Generating Function, Power Law Distribution, Yield Curve

JEL Classification: G11, G12, E44, E21

Suggested Citation

Chibane, Messaoud and Lioui, Abraham and Poncet, Patrice, Housing, Risk Aversion and Asset Prices (November 28, 2017). Available at SSRN: https://ssrn.com/abstract=2909043 or http://dx.doi.org/10.2139/ssrn.2909043

Messaoud Chibane

Neoma Business School ( email )

1 Rue du Maréchal Juin
Mont Saint Aignan Cedex, 76825
France

Abraham Lioui (Contact Author)

EDHEC Business School ( email )

France

Patrice Poncet

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France
33 1 3443 3000 (Phone)
33 1 3443 3001 (Fax)

Universite Paris I Pantheon Sorbonne ( email )

Finance Department, UFR 06
17 rue de la Sorbonne
75005 Paris
France
33 1 40 46 2783 (Phone)
33 1 40 46 33 66 (Fax)

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