Assessing the Interaction between Real Estate and Equity in Households Portfolio Choice.

Abstract

In this paper, we provide a new empirical analysis of the dynamic portfolio decisions of households by simultaneously considering their stock market participation and home tenure choices. There is already a huge body of literature on housing status (own/rent) decisions and many contributions documented the low stock market participation rate of US households. Although some papers evidenced that the home status (modeled as an exogenous variable) has an impact on the stock proportion in portfolio, our paper is the first one to allow both decisions (home and stock) to be simultaneous and endogenous. We estimate a dynamic bivariate logistic panel data model on Panel Study of income Dynamics data from 1999 to 2007 controlling for sample selection bias and time-invariant unobserved heterogeneity. We first evidence that our original joint setup outperforms a standard one (with two distinct equations for stock holdings and for home tenure), i.e. marginal odds ratios are significant. Using these estimates, we are able to simulate individual paths of stock and home equity positions over the life cycle according to households attributes. Ceteris Paribus, we show that households taking positions in one asset (home or stock) encounter a positive position in the other asset at an earlier stage in their life cycle, i.e. some households appear to be locked in a no-stock-and-renter position.households; Investment;