The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium


SvnieuweThis paper studies the role of time-varying risk premia as a channel for generating and propagating ‡fluctuations in housing markets, aggregate quantities, and consumption and wealth heterogeneity. We study a two-sector general equilibrium model of housing and non-housing production where heterogeneous households face limited opportunities to insure against aggregate and idiosyncratic risks. The model generates large variability in the national house price-rent ratio, both because it ‡fluctuates endogenously with the state of the economy and because it rises in response to a relaxation of credit constraints and decline in housing transaction costs (…financial market liberalization). These factors, together with a rise in foreign ownership of U.S. debt calibrated to match the actual increase over the period 2000-2006, generate ‡fluctuations in the model price-rent ratio that explains a large fraction of the increase in the national price-rent ratio observed in U.S. data over this period. The model also predicts a sharp decline in home prices starting in 2007, driven by the economic contraction and by a presumed reversal of the …financial market liberalization. Fluctuations in the model’s price-rent ratio are driven by changing risk premia, which ‡fluctuate endogenously in response to cyclical shocks, the …financial market liberalization, and its subsequent reversal. By contrast, we show that the infl‡ow of foreign money into domestic bond markets plays a small role in driving home prices, despite its large depressing infl‡uence on interest rates. Finally, the model implies that procyclical increases in equilibrium price-rent ratios re‡flect rational expectations of lower future housing returns, not higher future rents. JEL: G11, G12, E44, E21.


–Jack Favilukis, LSE; Sydney C. Ludvigson, NYU and NBER; Stijn Van Nieuwerburgh, NYU NBER CEPR

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Favilukis: Department of Finance, London School of Economics, Houghton Street, London WC2A 2AE; Email: j.favilukis@lse.ac.uk, http://pages.stern.nyu.edu/~jfaviluk. Ludvigson: Depart- ment of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012; Email: sydney.ludvigson@nyu.edu; Tel: (212) 998-8927; http://www.econ.nyu.edu/user/ludvigsons/. Van Nieuwerburgh : Department of Finance, Stern School of Business, New York University, 44 W. 4th Street, 6th Floor, New York, NY 10012; Email: svnieuwe@stern.nyu.edu; Tel: (212) 998-0673; http://pages.stern.nyu.edu/ svnieuwe/. This material is based on work supported by the National Science Foundation under Grant No. 1022915 to Ludvigson and Van Nieuwerburgh. We are grateful to Alberto Bisin, Daniele Coen-Pirani, Dean Corbae, Morris Davis, Bernard Dumas, Raquel Fernandez, Car- los Garriga, Bruno Gerard, Francisco Gomes, James Kahn, John Leahy, Chris Mayer, Jonathan McCarthy, Francois Ortalo-Magne, Stavros Panageas, Monika Piazzesi, Richard Peach, Gianluca Violante, Amir Yaron, and to seminar participants at Erasmus Rotterdam, the European Central Bank, ICEF, HEC Montreal, Lon- don School of Economics, London Business School, Manchester Business School, NYU, Stanford Economics, Stanford Finance, UCLA Finance, University of California Berkeley Finance, Université de Lausanne, Uni- versity of Michigan, University of Tilburg, University of Toronto, the University of Virginia McIntyre/Darden joint seminar, the American Economic Association annual meetings, January 2009 and January 2010, the ERID conference at Duke 2010, the London School of Economics Conference on Housing, Financial Markets, and the Macroeconomy May 18-19, 2009, the Minnesota Workshop in Macroeconomic Theory July 2009, the NBER Economic Fluctuations and Growth conference, February 2010, the European Finance Association meetings Frankfurt 2010, the NBER PERE Summer Institute meeting July 2010, the SED Montreal 2010, and the Utah Winter Finance Conference February 2010, the NBER Asset Pricing Meeting April 2011, the 2011 WFA meeting, the Baruch NYC Real Estate Meeting 2012, and the 2012 Philadephia Workshop on Macroeconomics for helpful comments. Any errors or omissions are the responsibility of the authors.



Derivatives and Systemic Risk: It’s Also about Jobs

Derivatives are the least understood component of systemic risk. Derivatives pose issues of size, measurement, and behavior—unlike loans. They string the biggest banks together in ways unseen three decades ago and even undermine job creation. Government officials may have had to bail in 2008, but nobody can claim that there will be no more bailouts until derivatives are better understood and managed.

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Three Popular Myths about the CFA Exam Multiple Choice Question Format

As every CFA® candidate will know, the CFA exams are largely comprised of multiple choice questions. This doesn't mean that they're easy to pass - as we've calculated, you're statistically more likely to win Euromillions than to pass the CFA exams by chance.

There are also many myths associated with the CFA multiple choice question format that CFA candidates still wrongly assume. We've covered tips on how to guess intelligently in the exams, and to our regular readers some of these will come as no surprise. But especially for those taking the exam in December, in this post we aim to bust more myths and clear the air for our readers about the CFA multiple choice question format before the upcoming exams.

Myth #1: Multiple-choice questions - it isn't that hard.

When I was in high school, I loved multiple-choice questions. They were the ideal exam format for my unrivalled laziness at studying, matched only by my desire to do well. And with multiple-choice, I could serve both interests - reading between the lines, you could sometimes correctly deduce the right answer without much contextual knowledge of the topic, as the wrong answers were not very convincing substitutes. This means you could study a heck of a lot less and still manage to do reasonably well. Exploiting this flaw in the system has served millions of lazy students like me very well through the decades.

The CFA exams, however, is not one of these systems.

I think it’s fair to say that CFA Institute probably puts as much effort into every wrong answer (distractors) than the right one. Creating the right answer is relatively easy for CFA Institute - you just answer the question correctly, and that’s it. To design the distractors, it’s a process of testing for most common mistakes made when one attempts the questions and offering them alongside the correct answer - meaning that two of the most common wrong answers among candidates tend to accompany the right answer.

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Good Habits of Top Performers

Each career is unique.  But, looking more closely, there are a handful of skills and habits that “successful” people commonly share.  Here are four of them, based on my professional experience.  

Continuing learning 

This will require dedication and discipline—both of which are difficult to fit into a lifestyle of quasi-instant gratification.  Moreover, in an increasingly dynamic learning environment, the quality and cost (where "expensive" might not always equal "good") of materials and instruction can vary enormously.  

That said, continuing education is very important at every stage of one’s career. We tend to disregard it at the beginning when we are fresh out of school, as the steep on-the-job learning curve can give the misleading impression that we are reaching maximum capacity. However, this is not enough. Those who get ahead continue to learn early on, beyond the daily grind. This is even more critical as we progress in our careers, but without getting any easier. The most successful have turned learning into a habit.  

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Email Subject Lines: How to Handle Boring Disclosures

What subject line should you use when you send clients a disclosure via email? This question came up came up when I spoke to the Financial Planning Association of Massachusetts in 2013. 

The problem: Losing your clients’ attention

You send some emails because you need to move clients to action. Others, such as disclosures required by regulators, are less compelling.Choose your subject lines carefully, if you don’t want these emails to discourage your clients from reading your emails.

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Book Review: China Goes West


The financial world lives to gain from new trends, to get out front, grab an edge, and bring in the profits before the trend matures and a lot of competition moves in. With this focus, Joel Backaler's new book is especially welcome in its description of, and insights on, the ramping up of Chinese overseas investments. China Goes West: Everything You Need to Know About Chinese Companies Going Global has detailed, sophisticated analysis of the Chinese companies that are expanding outward, and of what this can involve. It is a realistic picture rather than just a trend forecast.

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The “Greatest” Carry Trade Ever? Understanding Eurozone Bank Risks


We show that eurozone bank risks during 2007-2013 can be understood as “carry trade” behavior. Bank equity returns load positively on peripheral (Greece, Italy, Ireland, Portugal, Spain, or GIIPS) bond returns and negatively on German government bond returns, which generated “carry” until the deteriorating GIIPS bond returns adversely affected bank balance sheets. We find support for risk-shifting and regulatory arbitrage motives at banks in that carry trade behavior is stronger for large banks and banks with low capital ratios and high risk-weighted assets. We also find evidence for home bias and moral suasion in the subsample of GIIPS banks. 


–Viral V. Acharya† Sascha Steffen‡

We thank an anonymous referee, Jacob Boudoukh, Martin Brown, Filippo di Mauro, Ruediger Fahlenbrach, Mariassunta Giannetti, Paul Glasserman, Paul Heidhues, Martin Hellwig, Gur Huberman, Vasso Ioannidou, Anil Kashyap, Bryan Kelly, Jan-Pieter Krahnen, David Lesmond, Christian Leuz, Marco Pagano, Hélène Rey, Joerg Rocholl, Anthony Saunders, Phil Strahan, Anjan Thakor, Elu von Thadden, Lucy White, Andrew Winton and participants in the 2014 Moody’s / SAIF Credit Research Conference, 2014 Conference on Regulating Financial Intermediaries, 2013 SFS Cavalcade, 2013 NBER Summer Institute IFM, 2013 CAF Summer Research Conference, 2013 FIRS Conference, 12th annual FDIC / JFSR conference, 49th Bank Structure and Competition Conference, 2012 C.R.E.D.I.T., 2nd Mofir Ancona and seminar participants at Darden, Deutsche Bundesbank, ESMT, Goethe University, Indiana, Lancaster, Leeds, Mainz, Norges Bank, NYU Stern, Ohio State University, Osnabrueck, and Tulane for valuable comments and suggestions. We are grateful to Matteo Crosignani and Diane Pierret for excellent research assistance. 

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Young, Fabulous and Unemployed: Strategies for Survival, Part II

Early-autumn weather is bracing. Millions of students eagerly gear up for a new school year.  Business leaders fine-tune their strategy for the fourth-quarter push.  It’s a time of optimism, renewed energy, and forward-looking thinking. 

But these times are painful for people who are unemployed. So, if you’re a recent college grad, it’s understandable that you miss the structure, rhythms, and deadlines of the semester. 

Bottom line: Take a job—any job.  As long as it won’t harm our health or violate you ethics, any job is better than no job.  If you hate it, leave it.  But it’s worth a try. 

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Recent Research: Highlights from Summer 2014

"Return Predictability and Dynamic Asset Allocation: How Often Should Investors Rebalance?"
The Journal of Portfolio Management (Summer 2014
Himanshu Almadi, David E. Rapach, and Anil Suri

To exploit return predictability via dynamic asset allocation, investors face the important practical issue of how often to rebalance their portfolios. More frequent rebalancing uses statistically and economically significant short-horizon return predictability to aggressively pursue the dynamic investment opportunities afforded by changes in expected returns. However, the degree of return predictability typically appears stronger at longer horizons, which, along with lower transaction costs, favors less frequent rebalancing. The authors analyze the performance effects of rebalancing frequency in the context of dynamic portfolios constructed from monthly, quarterly, semi-annual, and annual return forecasts for US stocks, bonds, and bills, where the dynamic portfolios rebalance at the same frequency as the forecast horizon. Along the transaction-cost/rebalancing frontier, monthly (annual) rebalancing provides the greatest outperformance when unit transaction costs are below (above) approximately 50 basis points, and dynamic portfolios based on annual rebalancing typically outperform the benchmarks for unit transaction costs well in excess of 400 basis points.

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How to Recover from a CFA Exam Failure

CFA® candidates have to face the very real possibility of failure.

As the CFA exam is no ordinary exam, the high failure rates actually mean that there is significantly more disappointment than the average qualification. Also, CFA candidates tend to be overachievers - i.e., not used to failing. I had my own bittersweet experience in this once in Level IIso did others

So how should you adequately recover from not passing your CFA exams, and ensure you bounce back stronger than before?

Feel sorry for yourself for a while. 

It's normal and allowed, and you should go through this phase. You've put in a lot of effort, so it would be absurd if you weren't disappointed. Allow yourself a week or so to mope.

Pick yourself up, and realize that in the grand scheme of things this is just a blip in your path to greatdom.

Although the impact is devastating right now, eventually this will reduce to being a blip on your path in life. Thinking about the latter part will help you put this experience behind you and look forward.

A useful trick I've learnt is to think of yourself 10 years ago, and at that age, what crisis were you going through that made it seem like the world was ending. Chances are your 'crisis' 10 years ago seems very silly to you today. That's how you'll look back on today 10 years from now, so really, it's not a big deal.

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UBS Hires More Senior Coverage Bankers


UBS has been shifting the senior ranks for its corporate client solutions teams in Europe, following the appointment of William Vereker at the helm of the division last year. The result has been a string of departures at managing director level and the movement of others within the organisation over the past few months.

However, UBS has also been hiring and the bank has brought in some more senior coverage bankers this month. Anthony Iofe, who only switched to Bank of America Merrill Lynch to head up its corporates and special situations group for Russia and CIS from Deutsche Bank in May 2013, joined UBS last week* in a similar position.

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Insights from a Career in Risk Management


I’ve been in risk management for almost 20 years, first as a financial risk manager for a multinational company, then as a fixed income manager for a global pension fund.  Next, I worked as portfolio manager for a commodity risk and trading company.  Currently, I serve as a risk officer at a life insurance provider. 

Risk management in finance is a highly specialized role—even for a highly specialized industry.  But I do think that my experience has taught me some career management principles that are worth keeping in mind:   

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The Evolution of Value Investing: Past, Present, and Beyond

Considering the popularity of value investing, it is somewhat surprising that a paper recently published by Joseph Calandro in the Journal of Investing was the first formal attempt to categorize the development of this highly-effective and influential school of thought over time. The following article summarizes this categorization of value investing’s past and present and offers suggestions on what its future may hold.

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Book Review: Age of Ambition


Age of Ambition: Chasing Fortune, Truth, and Faith in the New China may be the best of the recent books on China. Author Evan Osnos was the Beijing correspondent for The New Yorker there, and his book is the record of an active journalist, "based on eight years of conversations." The resulting picture is of a large, dynamic country in the midst of rapid change, often in different directions. Osnos told the stories of individuals: some thriving in the system, others in deep trouble with political opposition, which gives a graphic feel for what it's like to strive and survive in China. We see practical realities ranging from how to bribe judges, to starting a Internet dating service.

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Investment Management: Getting Your Foot in the Door

If you are contemplating career in investment management, you should know the winning formula to gain entrance – as well as what you can do if your skills and experiences aren’t exactly on point. I spoke with a number of hiring managers who, not surprisingly, told me that ideal formula is: 

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NYSSA Friday Career Coffee™: How Changing Jobs Can Reawaken Your Career
Friday, October 10, 2014

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Friday, November 21, 2014

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FREE CFA® Level III Strategy Session and Essay Writing Sample Class

Monday, October 13, 2014
Instructor: O. Nathan Ronen, CFA

FREE CFA® Orientation 2015

Tuesday, November 18, 2014
Instructor: O. Nathan Ronen, CFA and Carl Crego, CFA

FREE CFA Level II Sample Class- Session A

Monday, November 24, 2014
Instructor: O. Nathan Ronen, CFA

FREE CFA Level III Sample Class- Session A

Tuesday, November 25, 2014
Instructor: O. Nathan Ronen, CFA

CFA® Level II Weekly Review – Session A Mondays

Monday, January 5, 2015 – Monday May 11, 2015
Instructor: O. Nathan Ronen, CFA

CFA® Level III Weekly Review – Session A Tuesdays

Tuesday, January 6, 2015 – Tuesday April 28, 2015
Instructor: O. Nathan Ronen, CFA

FREE CFA Level III Sample Class- Session B

Wednesday, January 14, 2015
Instructor: O. Nathan Ronen, CFA

CFA® Level III Weekly Review – Session B Thursdays

Thursday, January 15, 2015 – Thursday May 7, 2015
Instructor: O. Nathan Ronen, CFA

FREE CFA Level II Sample Class- Session B

Wednesday, January 21, 2015
Instructor: O. Nathan Ronen, CFA

CFA® Level II Weekly Review – Session B Wednesdays

Wednesday, January 28, 2015 – Wednesday May 13, 2015
Instructor: O. Nathan Ronen, CFA

CFA® Level III 6-Week Sunday Condensed Review

Sunday March 15, 2015 – Sunday May 3, 2015
Instructor: O. Nathan Ronen, CFA

CFA® Level II 6-Week Saturday Condensed Review

Saturday March 21, 2015 – Saturday May 2, 2015
Instructor: O. Nathan Ronen, CFA

CFA® Level II 4-Day Boot Camp

Thursday May 14, 2015 – Sunday May 17, 2015
Instructor: O. Nathan Ronen, CFA