Gomes, Francisco and Michaelides, Alexander (2003) Optimal life-cycle asset allocation: understanding the empirical evidence. Discussion paper: UBS Pensions Series 020, 474. Financial Markets Group, London School of Economics and Political Science, London, UK.
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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)|
|Additional Information:||© 2003 The Authors|
|Uncontrolled Keywords:||Life-cycle models, Portfolio choice, Preference heterogeneity, Liquidity constraints, Stock market participation, Uninsurable labor income risk|
|Library of Congress subject classification:||H Social Sciences > HG Finance
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
Departments > Economics
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