Gomes, Francisco and Michaelides, Alexander (2005) Optimal life-cycle asset allocation: understanding the empirical evidence. 4853. Centre for Economic Policy Research, London, UK.Full text not available from this repository.
We show that a life cycle model with realistically calibrated uninsurable labour 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:||© 2005 Francisco J. Gomes and Alexander Michaelides|
|Uncontrolled Keywords:||life-cycle models; liquidity constraints; portfolio choice; preference heterogeneity; stock market participation; uninsurable labour income risk|
|Library of Congress subject classification:||H Social Sciences > HG Finance|
|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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