Borrowing Costs and the Demand for Equity over the Life Cycle
Steven Davis (),
Felix Kubler () and
The Review of Economics and Statistics, 2006, vol. 88, issue 2, 348-362
We construct a life cycle model that delivers realistic behavior for both equity holdings and borrowing. 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. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Working Paper: Borrowing costs and the demand for equity over the life cycle (2005)
Working Paper: Borrowing Costs and the Demand for Equity Over the Life Cycle (2002)
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