FIN-04-010 |
NYU Stern School of Business |
May 2004 Revised November 2004
Hanno Lustig and Stijn Van Nieuwerburgh
ABSTRACT
In a model with housing collateral, 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. This collateral mechanism can quantitatively replicate the conditional
and the cross-sectional variation in risk premia on stocks for reasonable parameter values. The
increase of the conditional equity premium and Sharpe ratio when collateral is scarce in the
model matches the increase observed in US data. The model also generates a return spread of
value firms over growth firms of the magnitude observed in the data, because the term structure
of consumption strip risk premia is downward sloping.
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/~svnieuwe/
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