Stefano Corradin

Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs

We develop and solve a model of optimal portfolio choice with transaction costs and predictability in house prices. We model house prices using a process with a time-varying expected growth rate. Housing adjustments are infrequent and characterized by both the wealth-to-housing ratio and the expected growth in house prices. We find that the housing portfolio share immediately after moving to a more valuable house is higher during periods of high expected growth in house prices. We also find that the share of wealth invested in risky assets is lower during periods of high expected growth in house prices. Finally, the decrease in risky portfolio holdings for households moving to a more valuable house is greater in high-growth periods. These findings are robust to tests using household-level data from the Panel Study of Income Dynamics (PSID) and Survey of Income and Program Participation (SIPP) surveys. The coefficients obtained using model-simulated data are consistent with those obtained in the empirical tests.

Limits to Arbitrage: Empirical Evidence from Euro Area Sovereign Bond Markets

We document that the yield-to-maturity of an USD-denominated bond, once the foreign exchange rate risk is hedged, could be higher by more than 150 basis points than a comparable EUR-denominated bond issued by the same Euro area country between 2008-2013. Using panel and matching techniques, we find that the pricing anomaly (i) is due to the lower haircuts applied to EUR-denominated bonds for the European Central Bank (ECB) liquidity operations; (ii) is strongly positively related to the amount of EUR-denominated bonds pledged in exchange for liquidity when the credit spreads of the sovereign issuer reach extreme levels; (iii) is strongly positively related to the amount of EUR-denominated sovereign bonds pledged in exchange for liquidity with a 3-year horizon; and (iv) widens during the ECB purchases of EUR-denominated bonds.

Who Invests in Home Equity to Exempt Wealth from Bankruptcy

Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data from the Survey of Income and Program Participation for the period 1996-2006, we find that especially households with low net worth maintain a larger share of their wealth as home equity if a larger homestead exemption applies. This home equity bias is also more pronounced if the household head is in poor health, increasing the chance of bankruptcy on account of unpaid medical bills. The bias is further stronger for households with mortgage finance, shorter house tenures, and younger household heads, which taken together reflect households that face more financial uncertainty.

On collateral: implications for financial stability and monetary policy

This paper examines the role of collateral in the financial system, with special emphasis on the implications for financial stability and the conduct of monetary policy. First, we review what drives the demand and supply for both real and financial collateral assets. Then we examine financial stability issues and the case for regulating the use of collateral. We discuss the role and design of market infrastructures such as central clearing counterparties (CCPs). Finally, we examine the interaction of standard and non-standard monetary policy and the functioning of private collateralised markets. We show that the use of collateral is neither a sufficient nor a necessary condition for financial stability. To ensure the stability of collateralised markets a mix of micro- and macro-prudential regulation, as well as a sufficient supply of safe public assets that can be used as collateral, are needed. JEL Classification: E59, E44, G18