June 2008

Housing, Home Production, and the Equity and Value Premium Puzzles

Morris A. Davis and Robert F. Martin


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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Last Update: October 19, 2020