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Federal Reserve Bank of Boston
Risk and Policy Analysis Unit Working Paper
Optimal portfolio choice with predictability in house prices and transaction costs
Stefano Corradin
José L. Fillat
Carles Vergara-Alert
Abstract

We study a model of portfolio choice, in which housing prices are predictable and adjustment costs must be paid when there is a housing transaction. We show that two state variables affect the agent's decisions: (i) his wealth-house ratio; and (ii) the time-varying expected growth rate of housing prices. The agent buys (sells) his housing assets only when the wealth-house ratio reaches an optimal upper (lower) boundary. These boundaries are time-varying and depend on the expected growth rate of housing prices. Finally, we use household level data from the PSID and SIPP surveys to test and support the main implications of the model, as well as portfolio rules and holdings of housing asset.


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Stefano Corradin & José L. Fillat & Carles Vergara-Alert, Optimal portfolio choice with predictability in house prices and transaction costs, Federal Reserve Bank of Boston, Risk and Policy Analysis Unit Working Paper QAU10-2, 2010.
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Keywords: Housing - Prices
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