Working Paper Series

Asset Pricing with Housing Booms and Busts

The U.S. economy witnessed several periods of booms and busts specific to the housing market. We generalize the Housing CCAPM by incorporating rare disasters into the dynamics of non-housing consum ...

Author(s) :

Messaoud Chibane

Patrice Poncet

Abstract :

The U.S. economy witnessed several periods of booms and busts specific to the housing market. We generalize the Housing CCAPM by incorporating rare disasters into the dynamics of non-housing consumption and rare booms and busts into housing consumption, and by assuming Epstein-Zin, rather than time-additive, preferences. We extend existing Cumulant Generating Function-based pricing formulas to a two-good economy and develop an exponential affine approximation for the wealth to consumption ratio which allows us to derive closed-form solutions for asset prices and interest rates. Using monthly U.S. data over the period 1959 - 2017 and a maximum likelihood estimation method, we show that introducing rare boom/bust events in housing expenditures, while retaining realistic preference parameters, is determinant in tting stylized nancial market characteristics such as a large equity premium and a high equity return volatility, a low riskless rate and a downward-sloping term structure of equity risk premia.

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

Link SSRN

Working Paper - Asset Pricing with Housing Booms and Busts - Messaoud Chibane, A...
(-1.00 B)
Date : 28/11/2017
Working Paper Number: WP-17-002

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