Real Estate and its Role in Household Portfolio Choice

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Abstract
We empirically examines the financial portfolio choice of households as a function of their exposure to real estate risk as a possible background risk. Using Panel Study of Income Dynamics data from 1984 to 2001, our estimation results control for sample selection and unobservable time-invariant heterogeneity in an environment of non-strictly exogenous explanatory variables. Our analysis finds that larger real estate exposure is correlated with a lower likelihood of stock market participation and with reduced holdings of stocks and other risky financial assets in households' financial asset portfolios. We also measure the variability of homeowners' house values and provide evidence that it is also associated with lower stock market participation and, conditional on participation, lower equity investments. Previous version titled "Real Estate and its Role in Asset Allocation"