Dynamic Asset Allocation in the Presence of Housing and Incomplete Markets

Download or read book Dynamic Asset Allocation in the Presence of Housing and Incomplete Markets written by Rune Mølgaard and published by . This book was released on 2015 with total page 73 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies in continuous time and in an incomplete market setting the optimal housing, consumption, labor and portfolio choice of an agent in the presence of stochastic house prices and wages. Thus, the house prices and wage rates cannot be spanned by the financial market. In particular, the paper investigates the optimal strategies under two different preference specifications with respect to housing. The paper provides new closed-form solutions in the special case in which the market is complete. In addition, the paper also studies the optimal housing, consumption, labor, portfolio and welfare implications of frictions in the housing market. Particularly, the optimal strategies and welfare loss are analyzed if the house is a non-traded asset. This paper suggests that the consumption, labor, speculative investment and hedging of human capital is similar across preference specification and frictions in the market for housing when the economy is complete. The consumption and labor strategies are, however, dependent on frictions in the market for housing in the case where the economy is incomplete. The welfare loss from these frictions is small in magnitude but will influence the optimal consumption, labor and portfolio choice.