Doctor of Philosophy, The Ohio State University, 2010, Economics

The first essay, “Pricing Housing Market Returns,” finds the housing premium to be smaller than the equity premium. Using state-level data that spans the 1983 to 2006 period, I estimate the asset pricing Euler equations from the intertemporal consumption problem faced by a representative consumer with Epstein-Zin (EZ) preferences. The EZ Capital Asset Pricing Model captures a large proportion of the variation in housing returns over the sample period, and I find there to be heterogeneity in the structural parameter estimates across geographies. Controlling for the risk priced by the model and the consumption value of housing, I find that the housing premium is smaller than the equity premium. This result is surprising given that frictions, such as high transaction costs and borrowing constraints, affect the investor in housing more than the investor in equities. I examine institutional differences between the asset classes and find that some of the difference between the two premia may be related to differences in the tax treatment between the two asset classes. The second essay, “Non-durable Consumption Volatility and Illiquid Assets,” finds that factors beyond the volatility of asset payoffs may significantly affect the volatility of the agent's consumption stream. The empirical failure of consumption-based asset pricing models is often attributed to the lack of volatility in aggregate measures of consumption. However, I illustrate in this paper that frictions faced by agents may lead to much higher levels of volatility in individual consumption than we observe in the aggregate data. I develop a life-cycle model of in which the consumer derives utility from non-durable consumption and stock in a risky asset: housing. Non-convex adjustment costs generate lumpy changes in the stock of the risky asset over the life-cycle. The model predicts that non-durable consumption volatility is increasing in both the ability to borrow against the assets held in the consumer's (open full item for complete abstract)

Committee: Pok-sang Lam PhD (Committee Chair); Donald Haurin PhD (Committee Member); Mario Miranda PhD (Committee Member) Subjects: Economics; Finance