why u s homeowners should not hold the market portfolio n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Why U.S. Homeowners Should Not Hold The Market Portfolio PowerPoint Presentation
Download Presentation
Why U.S. Homeowners Should Not Hold The Market Portfolio

Loading in 2 Seconds...

play fullscreen
1 / 49

Why U.S. Homeowners Should Not Hold The Market Portfolio - PowerPoint PPT Presentation


  • 62 Views
  • Uploaded on

Why U.S. Homeowners Should Not Hold The Market Portfolio. Guoliang Feng Ph.D. Candidate Department of Economics The George Washington University. April 10 th , 2013. Research Question. how should consumption constrained households allocate wealth to housing and risk assets. wealth.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Why U.S. Homeowners Should Not Hold The Market Portfolio' - lara


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
why u s homeowners should not hold the market portfolio

Why U.S. Homeowners Should Not Hold The Market Portfolio

Guoliang Feng

Ph.D. Candidate

Department of Economics

The George Washington University

April 10th, 2013

research question
Research Question

how should

consumption constrained households allocate wealth to housing and risk assets

wealth

house

stock

introduction
Introduction

1. Problem and Motivation

2. Literature Review

3. Theory and Model of Homeower’s Problem

4. Empirical Tests and Data

5. Simulation

6. Conclusions and Implications

1 problem failure to own equities
1. Problem: Failure to own equities
  • Previous research focuses on portfolio problems of the unconstrained households
  • Consumption constrained households behave very differently
    • They consume far more housing than they would hold in diversified portfolios
    • They hold a single house as their only risk asset along with risk free assets
    • As wealth increases, they pay down mortgage rather than owning other risk assets
1 problem low participation rate
1. Problem: Low participation rate
  • Empirical evidence from research
1 problem low equity holding
1. Problem: Low equity holding

Source: SCF chart book 2010

1 problem low equity holding1
1. Problem: Low equity holding

Source: SCF 2010. stock share and riskless asset shares are their ratios in financial assets (without housing wealth). Renters are excluded.

1 problem behavior vs theory
1. Problem: behavior vs theory
  • What households should do
    • Equity should be a significant share of the risk assets in a well diversified household portfolio
  • What households actually do
    • Households appear to be taking substantial unique risk in holding housing as a large single risk asset along with government guaranteed (often riskless) assets
  • Motivation: stockholding puzzle
    • Divergence between standard theoretical prediction and empirical evidence
    • The existing literature contributes little to explaining this puzzle
1 problem contribution of this paper
1. Problem: contribution of this paper
  • Estimating housing return for 38 cities
  • Explain the low participation rates of equity market
  • Explain the weak representation of S&P500 as stock market
  • Introduce the diversification gains from holding individual stocks
2 literature this paper builds on previous research
2.Literature : this paper builds on previous research
  • Make use of Correlation between housing and stock returns
    • Flavin and Yamashita (2002): use 4 cities’ housing return and S&P 500 to find no correlation
    • Pelizzon and Weber (2008) etc.: use market portfolios (not stocks) to calculate correlation
  • More accurate estimation of total housing returns
    • Method I: use HPI appreciation rate: Cocco (2005)
    • Method II: use returns of REITs: Yang et al (2012)
    • Method III: use returns of composite price index: Bucciol and Miniaci (2011)
    • Method IV: use constant CAP rate across MSAs: Flavin and Ymashita (2002
    • My method: accurate estimate local housing return
      • Total housing returns=capitalization rate (CAP)+ appreciation rate
3 model
3. Model
  • Variable definition
    • Mortgage schedule
    • Home equity return: Leveraged & Unleveraged
  • Model solving
    • Bench mark model (no leverage)
      • unconstrained households
    • Primary model (leverage)
      • consumption constrained households
      • Net Wealth=Housing Value*20%
  • proposition
3 2 model solve bench mark model
3.2 Model: solve bench mark model

Bench mark model: Unconstrained households’ maximization problem:

3 2 model solve primary model
3.2 Model: solve primary model

Primary model: constrained households’ maximization problem

3 3 model difference between two models
3.3 Model: difference between two models

Portfolio Returns

primary model

Bench mark model

Portfolio Risk

4 empirical tests and data
4. Empirical Tests and Data
  • asset and city definition
  • estimating home CAP rate
  • calculate home equity return
  • calculate variance-covariance matrix of asset returns
4 1 asset definition
4.1 asset definition
  • Household allocates wealth to financial assets and housing equity.
  • There are two models: choosing individual stocks or market portfolios.
    • Stocks: choose 10 representative stocks for 10 sectors
      • American Electric Power Co Inc. (AEP)
      • British Petroleum Plc. (BP)
      • DuPont Chemical (DD)
      • General Electric Co (GE)
      • International Business Machines (IBM)
      • Procter & Gamble Co (P&G)
      • Progressive Corp (PROG)
      • Universal Health Services Inc. (UHS)
      • Verizon Communications Inc. (VZ)
      • Wal-Mart Stores Inc. (WMT)
    • Market portfolios: only choose one of the 5 quasi mutual funds
      • market value-weighted portfolio (Vrate)
      • market equal-weighted portfolio (Erate)
      • S&P 500 Index (SP500)
      • 10-stock value-weighted portfolio (Vfund)
      • 10-stock equal-weighted portfolio (Efund))
4 2 data
4.2 Data
  • Data for computing total housing return
    • Mortgage interest rate: 30-year fixed mortgage rate, Freddie Mae
    • Annual property tax and cost rate: 2%
    • Data for CAP estimation: AHS
    • Data for Appreciation estimation: FHFA
  • Data for Stock and market portfolio: CRSP
  • Data for Inflation: BLS
  • Year: 1985-2009
5 simulation
5. Simulation
  • Bench mark model Simulation
    • Case I: choose individual stocks and house
    • Case II: choose market portfolios and house
  • Primary Model Simulation
    • Case III: choose individual stocks and house
    • Case IV: choose market portfolios and house
5 simulation1
5. Simulation
  • Bench mark model Simulation
    • Case I: choose individual stocks and house
    • Case II: choose market portfolios and house
  • Primary Model Simulation
    • Case III: choose individual stocks and house
    • Case IV: choose market portfolios and house
5 simulation2
5. Simulation
  • Bench mark model Simulation
    • Case I: choose individual stocks and house
    • Case II: choose market portfolios and house
  • Primary Model Simulation
    • Case III: choose individual stocks and house
    • Case IV: choose market portfolios and house
summary i
Summary I
  • Households have different portfolios as they live in different cities
  • Low shares of housing in standard portfolio model can only be applied to the unconstrained households
5 simulation3
5. Simulation
  • Bench mark model Simulation
    • Case I: choose individual stocks and house
    • Case II: choose market portfolios and house
  • Primary Model Simulation
    • Case III: choose individual stocks and house
    • Case IV: choose market portfolios and house
5 simulation4
5. Simulation
  • Bench mark model Simulation
    • Case I: choose individual stocks and house
    • Case II: choose market portfolios and house
  • Primary Model Simulation
    • Case III: choose individual stocks and house
    • Case IV: choose market portfolios and house
summary ii
Summary II
  • Consumption constrained households have different optimal housing shares as city changes
  • Consumption constrained households hold much higher housing compared with those in fully diversification case
  • Negative correlation between housing return and stocks returns bring diversification benefit
6 conclusion
6. Conclusion
  • Households have different optimal portfolios as their cities change
  • Individual stocks can bring more diversification benefits than market portfolios do to household portfolios
  • Consumption constrained households face higher portfolio risk, hold higher housing than that for investment purpose alone