Heterogenous Agents, Time-varying Macro Fundamental and Asset Market Dynamics

This paper proposes a new channel to explain the positive price-volume correlation in the housing market. I study a simple overlapping generations model in the presence of heterogeneous agents. In the model, (i) consumer investors are forward looking and heterogeneous both in their holding periods and in their ownership preference, (ii) the underlying time varying macro fundamental is persistent, (iii) there are no transaction costs/frictions, and (iv) an auction is the micro-mechanism for price formation. In equilibrium, short horizon buyers are more likely to win the asset when prices are high whereas long horizon buyers on average win more when prices are low. This state-dependent ownership structure then naturally leads to a higher expected turnover rate in good times given a (positively) persistent macro dynamics. Empirically I document novel findings that are consistent with my model’s asset pricing implications. Owners’ ex ante holding horizons co-vary negatively with asset prices. Owners’ expected durations also have predictive power on future returns, particularly the return component that is forecastable by macro conditions. ∗I am very grateful to Jonathan Berk, Thomas Davidoff, Bob Edelstein, Dwight Jaffee and Nancy Wallace for their guidance, comments and suggestions. I also thank Stefano Corradin and seminar participants at the University of California, Berkeley for helpful discussions and comments. All errors are mine alone. This is a preliminary version and I appreciate all comments. Correspondence: Wenlan Qian, Haas School of Business, S545, #1900, University of California, Berkeley CA 94720. Email: [email protected].