Asset pricing and asset allocation in the presence of durable consumption goods
The first chapter of this dissertation investigates the implications of non-separable preferences over durable and nondurable consumption for asset pricing tests when adjusting durable consumption is costly. In an economy without adjustment costs, in which a frictionless rental market exists for the durable good, the standard Euler equation with respect to nondurable consumption will hold for each individual agent as well as for aggregate data. If the adjustment of the durable good is costly, however, aggregation generally fails. We use aggregate data to find substantial deviations from the frictionless model, consistent with the presence of non-convex adjustment costs for the durable good. We also show how empirical asset pricing tests that use aggregate data can be affected by these deviations. We then propose and implement asset pricing tests that are robust to the presence of adjustment costs by relying on microeconomic data. Using household-level observations of nondurable food and durable housing consumption, our estimation results suggest that preferences are indeed non-separable in the two consumption goods and that reasonable structural parameters characterize agents' intertemporal utility optimizations. The second chapter, joint with Cornelia Kullmann, empirically examines the financial portfolio choice of households as a function of their exposure to real estate risk as a possible background risk. Using Panel Study of Income Dynamics data from 1984 to 2001, our estimation results control for sample selection and unobservable time-invariant heterogeneity in an environment of non-strictly exogenous explanatory variables. Our analysis finds that larger real estate exposure is correlated with a lower likelihood of stock market participation and with reduced holdings of stocks and other risky financial assets in households' financial asset portfolios. We also measure the variability of homeowners' house values and provide evidence that it is also associated with lower stock market participation and, conditional on participation, lower equity investments.