Countercyclical Income Risk and Portfolio Choices over the Life-Cycle

Sylvain Catherine ()

No 1147, HEC Research Papers Series from HEC Paris

Abstract: This paper presents a life-cycle model that incorporates the cyclical skewness of labor income shocks. Cyclical skewness can explain the limited stock market participation of households with modest financial wealth and the positive age trend in conditional equity shares. Structural estimation reveals that a relative risk aversion of 5 and a yearly participation cost of $290 fits the US data. Omitting cyclical skewness leads to a three-fold overestimation of participation costs and generates a counterfactual decline of conditional equity shares. As its portfolio implications are smaller for wealthy households, cyclical skewness reduces aggregate demand for equity by only 15%.

Keywords: Household finance; Labor income risk; Portfolio choices; Human capital; Life-cycle model; Simulated method of moments (search for similar items in EconPapers)
JEL-codes: D14 D91 G11 G12 H60 J24 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2016-05-13
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1147

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