Christopher Heiberger, Daniel Fehrle
The
return on everything and the business cycle in production economies
Abstract:
The
risk premium puzzle is even worse than previously reported if housing
is also taken into consideration next to equity. While housing premia
are only moderately smaller than equity premia, they are significantly
less volatile and the Sharpe ratio of housing is significantly larger.
Hence, three question arise: i) are existing approaches to explain the
equity premium puzzle also capable of explaining even larger Sharpe
ratios than previously required, ii) can return rates and volatilities
of various assets be differentiated, and iii) can different Sharpe
ratios between the two risky assets be matched.
We analyze these questions, next to business cycle statistics, by
including housing into seminal approaches to solve the risk premium
puzzle in production economies. Non-disaster economies with habit
formation, capital adjustment costs and limited factor mobility fail to
generate a Sharpe ratio of housing of the empirically observed size and
do not explain co-moving economic activity. A basic model with
time-varying disaster risk can reproduce the large Sharpe ratio of
housing. Moreover, the model can explain different means and
volatilities of the risky assets, economic activity comoves and the
model explains the volatility ratio of business investments,
residential investments and house prices. However, the model does not
allow to disentangle the Sharpe ratios of the risky assets and premia
on equity remain too involatile.
JEL: C63, E32, E44, G12
Paper:
Paper available as pdf-file.
Beitrag Nr. 338, Volkswirtschaftliche Diskussionsreihe, Institut
für
Volkswirtschaftslehre der Universität Augsburg
Contact:
Christopher
Heiberger, University of Augsburg, Department of Economics,
D-86135
Augsburg,
Germany, phone +49-821-598-4189, fax +49-821-598-4231
email: christopher.heiberger@wiwi.uni-augsburg.de
Daniel Fehrle, University of Augsburg, Department of Economics,
D-86135
Augsburg,
Germany, phone +49-821-598-4201, fax +49-821-598-4231
email: daniel.fehrle@wiwi.uni-augsburg.de
Bo., 10.05.2020