Gomes, Francisco and Michaelides, Alexander (2003) Optimal life-cycle asset allocation: understanding the empirical evidence. Financial Markets Group Discussion Papers (474). Financial Markets Group, The London School of Economics and Political Science, London, UK.
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Abstract
We show that a life-cycle model with realistically calibrated uninsurable labor income risk and moderate risk aversion can simultaneously match stock market participation rates and asset allocation decisions conditional on participation. The key ingredients of the model are Epstein-Zin preferences, a fixed stock market entry cost, and moderate heterogeneity in risk aversion. Households with low risk aversion smooth earnings shocks with a small buffer stock of assets and consequently most of them (optimally) never invest in equities. Therefore, the marginal stockholders are (endogenously) more risk-averse and as a result they do not invest their portfolios fully in stocks.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | https://www.fmg.ac.uk/ |
| Additional Information: | © 2003 The Authors |
| Divisions: | Financial Markets Group Economics |
| Subjects: | H Social Sciences > HG Finance H Social Sciences > HB Economic Theory |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions |
| Date Deposited: | 19 Aug 2009 10:14 |
| Last Modified: | 13 Sep 2024 19:50 |
| URI: | http://eprints.lse.ac.uk/id/eprint/24900 |
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