Borrowing costs and the demand for equity over the life cycle

Steven Davis, Felix Kubler and Paul Willen

No 05-7, Working Papers from Federal Reserve Bank of Boston

Abstract: 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)
Date: 2005
New Economics Papers: this item is included in nep-fmk and nep-mac
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Citations: View citations in EconPapers (33)

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Related works:
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)
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