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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, The 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
Divisions: Financial Markets Group
Subjects: H Social Sciences > HB Economic Theory
JEL classification: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
Date Deposited: 28 Aug 2009 09:17
Last Modified: 06 Sep 2022 12:35

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