Labor-Market Uncertainty and Portfolio Choice Puzzles

Yongsung Chang, Jay Hong and Marios Karabarbounis

No 14-13, Working Paper from Federal Reserve Bank of Richmond

Abstract: The standard theory of household-portfolio choice is hard to reconcile with the following facts: (i) Households hold a small amount of equity despite the higher average rate of return. (ii) The share of risky assets increases with the age of the household. (iii) The share of risky assets is disproportionately larger for richer households. We develop a life-cycle model with age-dependent unemployment risk and gradual learning about the income profile that can address all three puzzles. Young workers, on average asset poor, face larger labor-market uncertainty because of high unemployment risk and imperfect knowledge about their earnings ability. This labor-market uncertainty prevents them from taking too much risk in the financial market. As the labor-market uncertainty is gradually resolved over time, workers can take more financial risks.

Keywords: Portfolio Choice; Labor-Market Uncertainty; Learning (search for similar items in EconPapers)
JEL-codes: J6 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2014-06-14
New Economics Papers: this item is included in nep-dge
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Related works:
Journal Article: Labor Market Uncertainty and Portfolio Choice Puzzles (2018)
Working Paper: Labor-Market Uncertainty and Portfolio Choice Puzzles (2014)
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