Most of the asset pricing literature studies equity returns in models abstracting from the determination of business cycle and housing market variables. While labor income represents two-third of total value added, the role of labor supply in explaining the behavior of asset prices remains widely unexplored. Moreover, whereas housing is by far the largest component of household total wealth, few studies have attempted to study equity returns in models also able to explain the dynamics of house prices and residential investment.
This paper explores the asset pricing implications of introducing housing into general equilibrium business cycle models. Following Davis and Heathcote (2005), a representative agent model with a housing and a corporate sector is developed. Labor supply is endogenously determined and agents can freely decide how to allocate their time between leisure activities and hours worked in the two sectors. New homes are produced by a housing sector which uses labor and residential capital as factors of production. The corporate sector produces a final output good using labor and business capital.
Since the first Basel capital accord in 1988, the prevailing approach to bank regulation has put capital at front and center: more capital should make banks better able to absorb losses with their own resources, without becoming insolvent or necessitating a bailout with public funds. In addition, by forcing bank owners to have some skin in the game, minimum capital requirements should curb incentives for excessive risk taking created by limited liability and amplified by deposit insurance and bailout expectations. Over the last 20 years, regulatory capital requirements have been refined and broadened to cover various types of risk, differentiate among asset classes of different risk, and allow for a menu of approaches to determine the risk weights to be applied to each asset category. In the process, the rules have become increasingly elaborate, reflecting the growing complexity of modern banking, but also the need to address ongoing efforts by regulated entities to circumvent the requirements through financial innovation.
What is meant by “argue?” The above subtitle is a deliberate play on two meanings of this word. In the most common, or “negative” sense, “having an argument” implies an emotional disagreement. This is not what is meant by how philosophers should argue. (Some of them have been known to slip-up, of course. As philosophers, however, they should know better.)
