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

Julio Gálvez and Gonzalo Paz-Pardo

No 2810, Working Paper Series from European Central Bank

Abstract: Households face earnings risk which is non-normal and varies by age and over the income distribution. We show that allowing for these rich features of earnings dynamics, in the context of a structurally estimated life-cycle portfolio choice model, helps to rationalize 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. We also find renewed support for rule-of-thumb investment strategies under the model with the nonlinear earnings process. JEL Classification: G11, G12, D14, D91, J24, H06

Keywords: earnings risk; household finance; simulated method of moments; stock ownership; wealth accumulation (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-dge and nep-lma
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Richer earnings dynamics, consumption and portfolio choice over the life cycle (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20232810

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