Housing, home production, and the equity- and value-premium puzzles |
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Authors: | Morris A. Davis Robert F. Martin |
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Affiliation: | aDepartment of Real Estate and Urban Land Economics, 5261 Grainger Hall, 975 University Avenue, Madison, WI 53706, University of Wisconsin-Madison, USA;bInternational Finance Division, Federal Reserve Board, 20th and C Streets NW, Washington, DC 20051, USA |
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Abstract: | We ask if a standard representative agent model with a home-production sector can resolve the equity-premium or value-premium puzzles. In the model, agents value market (numeraire) consumption and a home consumption good that is produced from the stock of housing, home labor, and a labor-augmenting technology shock. We construct the unobserved quantity of the home consumption good by combining observed data on numeraire consumption, hours worked in the marketplace, and rents paid on housing with restrictions of the model. We test the first-order conditions of the model using GMM. The model is rejected by the data; it cannot explain either the historical equity-premium or the value-premium. |
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Keywords: | Housing House prices Equity-premium Value-premium |
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