International Finance Discussion Papers (IFDP)
June 2008
Housing, Home Production, and the Equity and Value Premium Puzzles
Morris A. Davis and Robert F. Martin
Abstract:
We test if a standard representative agent model with a home-production sector can resolve the equity premium or value premium puzzles. In this model, agents value market consumption and a home consumption good that is produced as an aggregate of the stock of housing, home labor, and a labor-augmenting technology shock. We construct the unobserved quantity of the home consumption good by combining observed data with restrictions of the model. We test the first-order conditions of the model using GMM. The model is rejected by the data; it cannot explain either the historical equity premium or the value premium.
Full paper (screen reader version)Keywords: Elasticity of eubstitution, durable consumption, house prices
PDF: Full Paper
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