FIN-04-009 |
NYU Stern School of Business |
May 2004
Hanno Lustig and Stijn Van Nieuwerburgh
ABSTRACT
Time-variation in the degree of risk-sharing induced by changes in the value of housing collateral sheds new light on
the consumption correlation puzzle. If debts can only be enforced to the extent that they are collateralized by housing
wealth, a decrease in the value of housing collateral endogenously increases exposure to idiosyncratic risk. This
increases the cross-sectional consumption growth dispersion across regions and it reduces the amount of regional income
risk shared. We investigate risk-sharing patterns for the 30 largest US metropolitan areas and find empirical support
for the housing collateral channel. In times when housing collateral is scarce, the dispersion of consumption growth
relative to income growth is twice as high as when collateral is abundant. A structural estimation of the model's
consumption dynamics implies a time path for consumption growth dispersion that matches the one in the data. The housing
collateral effect is they key element that enables this match.
Hanno Lustig
Institution: University of Chicago
Email: hlustig@uchicago.edu
Stijn Van Nieuwerburgh
Institution: Stern School of Business, New York University
Phone: (212) 998-0673
Fax: (212) 995-4233
Email: svnieuwe@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~dyermack/
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