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Volver Portfolio Choice with Indivisible and Illiquid Housing Assets: The Case of Spain

WPnull/12 Portfolio Choice with Indivisible and Illiquid Housing Assets: The Case of Spain
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This paper presents a procedure for computing the theoretically optimal portfolio under the assumption that housing is an indivisible, illiquid asset that restricts the portfolio choice decision. The analysis also includes the financial constraints households may face when they apply for external funding. The set of financial assets that constitute the household's portfolios are bank time deposits, stocks, mortgage, and housing. We compare the theoretically optimal portfolio against Spanish household's actual choices using a unique data set, the Spanish Survey of Household Finance. In comparison with the optimal portfolio, households significantly underinvest in stocks and deposits. In the case of mortgages, the optimal and actual portfolios weights are not unequal. At a more disaggregated level, some additional differences emerge that are explained by demographic, educational, and income characteristics.

Classification JEL:C61, D14, G11

Keywords:Portfolio choice, Households, Indivisible illiquid assets, Financial constraints, Under-investment,

Number of Pages:52

Creation Date:2012-12-21




Raúl Bajo

Raúl Bajo

Campus Universitario

31009 Pamplona, España

+34 948 42 56 00


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