Borrowing costs and the demand for equity over the life cycle

Steven Davis (), Felix Kubler () and Paul Willen

No 05-7, Working Papers from Federal Reserve Bank of Boston

Abstract: We construct a life-cycle model that delivers realistic behavior for both equity holdings and borrowings. The key model ingredient is a wedge between the cost of borrowing and the risk-free investment return. Borrowing can either raise or lower equity demand, depending on the cost of borrowing. A borrowing rate equal to the expected return on equity — which we show roughly matches the data — minimizes the demand for equity. Alternative models with no borrowing or limited borrowing at the risk-free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings.

Keywords: Households - Economic aspects; Investments (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-mac
Date: Written 2005
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Related works:
Working Paper: Borrowing Costs and the Demand for Equity Over the Life Cycle (2002)
Journal Article: Borrowing Costs and the Demand for Equity over the Life Cycle (2006)
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