Essays on Housing, Consumption, and Asset Prices

Abstract

This thesis is a collection of three essays that analyze the interplay between financial and mortgage markets, and household consumption. In Chapter 1, we study the spillovers from government intervention in the mortgage market on households' consumption. After an expansionary mortgage market operation, the consumption response of homeowners with mortgage debt is large and significant, while the consumption response of homeowners without the mortgage debt is small and insignificant. Non-homeowners also increase their consumption but less than mortgagors. We also find that expansionary policy significantly increases consumption inequality of mortgagors. We explain these facts through the lens of a life-cycle model with incomplete markets and endogenous housing choice. Reduction in credit rates creates extra wealth for the mortgagors while the reduction in interest rates shifts this wealth towards consumption. Increase in wealth is bigger for those with a larger mortgage -- this exacerbates consumption inequality. In Chapter 2, we study the role of durable consumption in the context of long-run risk models. These models became a cornerstone in the macro-finance literature for their ability to capture key asset-price phenomena. They are, however, known to entail implausibly high levels of timing and risk premia. In this chapter, we resolve this puzzle by considering the consumption of durable goods in addition to that of non-durable goods. In our estimated model, the timing premium is 11 percent and the risk premium is 16 percent of lifetime consumption. These values are about a third of the previously implied premia and are more consistent with empirical and experimental evidence. In Chapter 3, using the Michigan Survey of Consumers, we provide evidence that a rise in consumers' beliefs about current and future aggregate durable expenditure predicts a rise in expected returns. We rationalize this finding through a consumption-based asset pricing model with recursive preferences over non-durable and durable goods and uncertainty about the underlying endowments. The model generates high equity premium, low and stable risk-free rate, and explains up to 60% of the volatility of equity premium, with calibrated parameters that are consistent with the macroeconomic literature (risk aversion of 2.1 and elasticity of intertemporal substitution of 1.09).

Date of Award	1 Aug 2019
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Klaus Schenk-Hoppe (Supervisor) & Raffaele Rossi (Supervisor)