Endogenous Life-Cycle Housing Investment and Portfolio Allocation

This paper develops a life-cycle portfolio allocation model to address the effects of housing investment on the portfolio allocation of households. The model employs a comprehensive housing investment structure, Epstein-Zin recursive preferences and a stock market entry cost. Furthermore, rather than resorting to calibration we estimate the value of the relative risk aversion and elasticity of intertemporal substitution. The model shows that housing investment has a strong crowding out effect on investment in risky assets throughout the life-cycle and predicts that homeowners are, by and large, wealthier than renters and invest more in risky assets than renters.