Working Paper

Portfolio choice with house value misperception


Abstract: Households systematically overvalue or undervalue their houses. We compute house value misperception as the difference between self-reported and market house values. Misperception is sizable, countercyclical, and persistent. We find that a 1 percent increase in house overvaluation results, on average, in a 4.56 percent decrease in the share of risky stock holdings for those households that participate in the stock market. We then build a rational inattention model in which households make decisions based on their perceived level of housing wealth. Numerical simulations generate the effects of house value misperception on the portfolio choices that we observe in the data.

Keywords: transaction costs; information costs; portfolio choice; inaction bands; rational inattention; housing;

JEL Classification: D91; D11; C61; G11; R21;

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Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 2017-10-01

Number: 17-16

Pages: 59 pages