Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perspective

56 Pages Posted: 23 Jun 2004 Last revised: 27 Aug 2012

See all articles by Hanno N. Lustig

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

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Date Written: March 15, 2004

Abstract

In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. Using aggregate data for the US, we find that a decrease in the ratio of housing wealth to human wealth predicts higher returns on stocks. Conditional on this ratio, the covariance of returns with aggregate risk factors explains eighty percent of the cross-sectional variation in annual size and book-to-market portfolio returns.

Keywords: Asset Pricing, Risk Sharing

Suggested Citation

Lustig, Hanno N. and Van Nieuwerburgh, Stijn, Housing Collateral, Consumption Insurance and Risk Premia: An Empirical Perspective (March 15, 2004). EFA 2004 Maastricht Meetings Paper No. 1403, Journal of Finance, Vol. 60, No. 3, 2005, Available at SSRN: https://ssrn.com/abstract=556101 or http://dx.doi.org/10.2139/ssrn.556101

Hanno N. Lustig

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