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Research Seminars & Workshops @ IRES

Professor Francois Ortalo-Magne
Wisconsin School of Business

Spatial Asset Pricing: A First Step


24 November 2009


2.00 pm


RMI Executive Seminar Room


Market clearing for residential properties requires two conditions be satisfied: both the consumption demand (who uses the properties) and the investment demand (who owns the properties) must equal supply. Consumption demand has traditionally been the focus of the urban economics literature, while investment has been studied by financial economics. We build on standard approaches in both fields to explore the interaction between household location and investment choices, between the endogenous determination of rents across locations and the endogenous pricing of real estate and financial assets. Moving to a location amounts to acquiring a “location security” yielding: (i) a positive stochastic local labor income stream; (ii) a negative stochastic local rent payment stream. We obtain a close‐form representation for rents, portfolio allocations and asset prices. We characterize the relation between the equilibrium spatial distribution of human capital and local differences in real estate risk premia and provide avenues for further progress in both urban and financial economics.

For full paper, download here

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