Homeownership, committed expenditure risk, and the stockholding puzzle

Kimball (1991) showed that consumers who face an unavoidablerisk will display 'temperance', meaning that they will increasetheir holdings of safe assets. In principle, temperance couldprovide an explanation for the stockholding puzzle, which isthe microeconomic manifestation of the equity premium puzzle.Previous work has shown that the temperance effect induced bylabor income uncertainty is too small to explain the stockholdingpuzzle. This paper finds that committed expenditure risk associatedwith homeownership induces enough additional temperance to explainthe puzzle.