Richer earnings dynamics, consumption and portfolio choice over the life cycle

Julio Gálvez and Gonzalo Paz-Pardo
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Julio Gálvez: Banco de España

No 2241, Working Papers from Banco de España

Abstract: Households face earnings risk which is non-normal and varies by age and over the income distribution. We show that, in the context of a structurally estimated life-cycle portfolio choice model, allowing for these rich features of earnings dynamics helps to better understand the limited participation of households in the stock market and their low holdings of risky assets. Because households are subject to more background risk than previously considered, the estimated model implies a substantially lower coefficient of risk aversion and a lower optimal risky asset share for older workers with low wealth and high earnings.

Keywords: portfolio choice; life cycle; earnings dynamics; household finances; simulated method of moments (search for similar items in EconPapers)
JEL-codes: D14 D91 G11 G12 G5 J24 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2022-11
New Economics Papers: this item is included in nep-des and nep-dge
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https://www.bde.es/f/webbde/SES/Secciones/Publicac ... 22/Files/dt2241e.pdf First version, november 2022 (application/pdf)

Related works:
Working Paper: Richer earnings dynamics, consumption and portfolio choice over the life cycle (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2241

DOI: 10.53479/23706

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