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RFS Advance Access published online on August 25, 2004
Review of Financial Studies, doi:10.1093/rfs/hhi006
Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved
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Original Articles

Portfolio Choice in the Presence of Housing*

João F. Cocco 1*
1 London Business School

* To whom correspondence should be addressed. E-mail: jcocco{at}london.edu.


  Abstract

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.

* I would like to thank the editor, John Heaton, and two anonymous referees for comments that greatly improved this paper. This paper is a substantially revised version of chapter 4 of my Harvard Ph.D. Thesis. I am grateful to my thesis committee John Y. Campbell, David I. Laibson and N. Gregory Mankiw for guidance. I have also benefited from comments by Rui Albuquerque, Alberto Alesina, Francisco Gomes, Paula Lopes, Pascal Maenhout, Daniele Paserman, Andrei Shleifer, Raman Uppal, Luis Viceira, David Weil and seminar participants at Cemfi, Columbia, Harvard, Insead, Kellogg, London Business School, the NBER Finance Lunch, Pompeu Fabra, Princeton, Virginia, and Wharton. Financial support from the Banco de Portugal and Fundação para a Ciência e Tecnologia is gratefully acknowledged.


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