Portfolio choice and precautionary savings

Riccardo Calcagno and Mariacristina Rossi
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Riccardo Calcagno: EM - EMLyon Business School, Collegio Carlo Alberto - UNITO - Università degli studi di Torino = University of Turin

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Abstract: We study the effect on savings of an increase in the capital risk of the investment opportunities when the representative consumer is allowed to optimally choose her portfolio. Sandmo (1970) and Levhari and Srinivasan (1969) prove that individuals with high risk-aversion and time-separable, power utility increase their optimal savings when capital risk increases holding constant the expected return of the risky asset. We obtain the opposite effect when the consumer chooses her portfolio allocation optimally.

Date: 2011-05-01
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Published in Economics Bulletin, 2011, 31 (2), 1353-1361 p

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Related works:
Journal Article: Portfolio Choice and Precautionary Savings (2011)
Working Paper: Portfolio Choice and Precautionary Savings (2010)
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