Borrowing costs and the demand for equity over the life cycle
Steven Davis (),
Felix Kubler () and
Paul S. Willen
No 05-7, Working Papers from Federal Reserve Bank of Boston
We construct a life-cycle model that delivers realistic behavior for both equity holdings and borrowings. 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.
Keywords: Households - Economic aspects; Investments (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (30) Track citations by RSS feed
Downloads: (external link)
Journal Article: Borrowing Costs and the Demand for Equity over the Life Cycle (2006)
Working Paper: Borrowing Costs and the Demand for Equity Over the Life Cycle (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbwp:05-7
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of Boston Contact information at EDIRC.
Series data maintained by Catherine Spozio ().