Faculty of Economics and Business Administration Publications Database

Efficient portfolios when housing needs change over the life cycle

Weber, Guglielmo
Volume: 33
Number: 11
Pages: 2110 - 2121
Month: November
ISSN-Print: 0378-4266
Link External Source: Online Version
Year: 2009
Keywords: Housing and portfolio choice; Portfolio efficiency; Rental risk; Life cycle

We address the issue of the efficiency of household portfolios in the presence of housing risk. We treat housing stock as an asset and rents as a stochastic liability stream: over the life cycle, households can be short or long in their net-housing position. Efficient financial portfolios are the sum of a standard Markowitz portfolio and a housing risk hedge term that multiplies net housing wealth. Our empirical results show that net housing plays a key role in determining which household portfolios are inefficient. The largest proportion of inefficient portfolios obtains among those with positive net housing, who should invest more in stocks.