Optimal life-cycle asset allocation: understanding the empirical evidence

Francisco Gomes and Alexander Michaelides

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We show that a life-cycle model with realistically calibrated uninsurable labor income risk and moderate risk aversion can simultaneously match stock market participation rates and asset allocation decisions conditional on participation. The key ingredients of the model are Epstein-Zin preferences, a fixed stock market entry cost, and moderate heterogeneity in risk aversion. Households with low risk aversion smooth earnings shocks with a small buffer stock of assets and consequently most of them (optimally) never invest in equities. Therefore, the marginal stockholders are (endogenously) more risk-averse and as a result they do not invest their portfolios fully in stocks.

Keywords: life-cycle models; portfolio choice; preference heterogeneity; liquidity constraints; stock market participation; uninsurable labor income risk (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2003-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://eprints.lse.ac.uk/24900/ Open access version. (application/pdf)

Related works:
Journal Article: Optimal Life‐Cycle Asset Allocation: Understanding the Empirical Evidence (2005)
Working Paper: Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence (2005)
Working Paper: Optimal life cycle asset allocation: understanding the empirical evidence (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24900

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().