In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing and increases household exposure to idiosyncratic risk. The conditional...

Bankruptcy brings the asset pricing implications of Lucas's (1978) endowment economy in line with the data. I introduce bankruptcy into a complete markets model with a continuum of ex ante identical agents who have CRRA utility. Shares in a Lucas tree serve as collateral. The model yields a...