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RFS Advance Access originally published online on August 25, 2004
Review of Financial Studies 2005 18(2):535-567; doi:10.1093/rfs/hhi006
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The Review of Financial Studies Vol. 18, No. 2 © 2004 The Society for Financial Studies; all rights reserved.

Portfolio Choice in the Presence of Housing

João F. Cocco
London Business School

Address correspondence to: João F. Cocco, London Business School, Regent's Park, London NW1 4SA, UK, Tel.: (020) 7262-5050 or e-mail: jcocco{at}london.edu

I show that investment in housing plays a crucial role in explaining the patterns of cross-sectional variation in the composition of wealth and the level of stockholdings observed in portfolio composition data. Due to investment in housing, younger and poorer investors have limited financial wealth to invest in stocks, which reduces the benefits of equity market participation. House price risk crowds out stockholdings, and this crowding out effect is larger for low financial net-worth. In the model as in the data leverage is positively correlated with stockholdings.


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