Faculty of Economics and Business Administration Publications Database

Are Household Portfolios Efficient? an Analysis Conditional on Housing

Weber, Guglielmo
Volume: 43
Number: 2
Pages: 401 - 431
Month: June
ISSN-Print: 0022-1090
Link External Source: Online Version
Year: 2008

Standard tests of portfolio efficiency neglect the existence of illiquid wealth. The most important illiquid asset in household portfolios is housing: if housing stock adjustments are infrequent, optimal portfolios in periods of no adjustment are affected by housing price risk through a hedge term and tests for portfolio efficiency of financial assets must be run conditionally upon housing wealth. We use Italian household portfolio data and time series on financial assets and housing stock returns to assess whether actual portfolios are efficient. We find that housing wealth plays a key role in determining whether portfolios chosen by homeowners are efficient.