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A human capital explanation for an asset allocation puzzle?

Gomes, Francisco and Michaelides, Alexander (2004) A human capital explanation for an asset allocation puzzle? Discussion paper: UBS Pensions Series 024, 491. Financial Markets Group, London School of Economics and Political Science, London, UK.

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We show that a life-cycle asset allocation model with liquidity constraints and realistically calibrated uninsurable labor income risk rationalizes the asset allocation puzzle of Canner, Mankiw and Weil (1997). Based on empirical estimates of the correlation between stock returns and individual earnings, labor income is a closer substitute to long-term bonds than to stocks. As a result, more risk averse investors hold a smaller proportion of their risky portfolio in equities. Moreover, this explanation is consistent with the recommendation that younger households should be more heavily invested in stocks than older households.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2004 The Authors
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Identification Number: 491
Date Deposited: 28 Aug 2009 09:17

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