FIN-03-024

Housing Collateral, Consumption Insurance and Risk Premia: an Empirical Perspective

August 2003

Stijn Van Nieuwerburgh

ABSTRACT
In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional disibution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. Using aggregate data for the US, we find that a decrease in the ratio of housing wealth to human wealth predicts higher returns on stocks. Conditional on this ratio, the covariance of returns with aggregate risk factors explains eighty percent of the cross-sectional variation in annual size and book-to-market portfolio returns.

Stijn Van Nieuwerburgh
Institution: Stern School of Business, New York University
Email: svnieuwe@stern.nyu.edu
Phone: (212) 998-0673
Fax: (212) 995-4233
Home Page: http://www.stern.nyu.edu/~svnieuwe/

To download a copy of this paper click here
To request a copy of this paper click here

The Department of Finance Working Paper Series is generously sponsored by