Working Papers

1. Portfolio Decisions with Higher-Order Dependence in Labor and Stock Markets (with Wei Jiang and Jialu Shen)

Research Excellence Award at the 2024 CIRF & CFRI Conference

Higher-order dependence measures extreme values jointly occurring in the labor and stock markets. Using Panel Study of Income Dynamics data, we document a higher-order dependence between labor and stock markets, and households adjust their portfolio decisions in response to this higher-order dependence risk. Higher-order dependence affects households’ wealth risk profile via the skewness and kurtosis channels, forcing households to lower their
risk exposures. Accounting for higher-order dependence reduces households’ risky shares by 28% and increases participation thresholds by 22%. On the other hand, ignoring higher-order dependence generates certainty equivalent wealth losses of 3% and increases wealth inequality by 2.7%.

2. Reverse Mortgages, Housing and Consumption: An Equilibrium Approach (with Ariel Sun and Jialu Shen)

Best Paper Award in Financial Institutions at the 2024 FMA Asia/Pacific Conference

Reverse Mortgages (RMs) enable eligible homeowners 62 years and older access to the liquidity of their home without them moving out or repaying before loan termination when the borrowers die or move to long-term care facilities. We incorporate RMs into a quantitative equilibrium life-cycle model to assess their impacts on household decisions, the mortgage and the housing market. We show that the volatility of consumption growth decreases for RM borrowers. Additionally, introducing RMs enhances the house’s perceived value to households, making homeownership a more financially attractive option and stimulating housing demand. These effects increase overall household welfare in our model, highlighting the positive impact of RMs.

3. Homeownership as Lifecycle Goldmine: Evidence from Macrohistory (with Yang Bai and Jialu Shen)

Should a household buy a home? Using data from 16 developed countries spanning 1870 to 2020, this study provides an affirmative answer through the analysis of homeownership’s economic benefits. Contrary to popular expert advice, homeowners realize lifetime wealth gains of up to 9% and welfare improvements of up to 22%, relative to renters who solely invest in stocks. Homeownership lowers the downside risk of wealth portfolio and enhances wealth equality. However, these benefits come at the expense of lower working-life wealth and reduced financial asset holdings. We also observe much heterogeneity: Less wealthy households financing for homeownership realize smaller wealth gains, while buying during moderately low interest rates maximizes the benefits. Overall, low (high) income homeowners benefit more from welfare (wealth) relative to high (low) income homeowners.

Work in Progress

4. Asset Pricing with Nonlinear Dependence in Labor and Stock Markets (with Wei Jiang and Jialu Shen)