Homeownership, committed expenditure risk, and the stockholding puzzle

Kimball (1991) showed that consumers who face an unavoidable risk will display 'temperance', meaning that they will increase their holdings of safe assets. In principle, temperance could provide an explanation for the stockholding puzzle, which is the microeconomic manifestation of the equity premium puzzle. Previous work has shown that the temperance effect induced by labor income uncertainty is too small to explain the stockholding puzzle. This paper finds that committed expenditure risk associated with homeownership induces enough additional temperance to explain the puzzle.