Owner-Occupied Housing in the Presence of Adjustment Costs: Implications for Asset Pricing and Nondurable Consumption

Topics:
Investment and Capital Markets
Tags:
Adjustment,
Asset,
Asset Management,
Asset Pricing,
Business Operations,
Operational Planning
Source:
University of California, San Diego

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Overview: The paper generalizes the Grossman and Laroque (1990) model of optimal consumption and portfolio allocation in the context in which a durable good (or house) subject to adjustment costs is both an argument of the utility function and a component of wealth. The analytical model shows that if the covariance matrix of asset returns is block diagonal in the sense that the return to housing is uncorrelated with the returns to financial assets, all households holds a single optimal portfolio of risky assets, despite differences among households in terms of preferences or in terms of the state variables faced.

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Format: PDF | Size: 195KB | Date: Oct 2001 | Pages: 32

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