Collateralized Borrowing and Life-Cycle Portfolio Choice

Paul Willen and Felix Kubler

No 12309, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the effects of collateralized borrowing in a realistically parameterized life-cycle portfolio choice problem. We provide basic intuition in a two-period model and then solve a multi-period model computationally. Our analysis provides insights into life-cycle portfolio choice relevant for researchers in macroeconomics and finance. In particular, we show that standard models with unlimited borrowing at the riskless rate dramatically overstate the gains to holding equity when compared with collateral-constrained models. Our results do not depend on the specification of the collateralized borrowing regime: the gains to trading equity remain relatively small even with the unrealistic assumption of unlimited leverage. We argue that our results strengthen the role of borrowing constraints in explaining the portfolio participation puzzle, that is, why most investors do not own stock.

JEL-codes: D14 G11 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-cfn, nep-cmp, nep-dge, nep-fin and nep-fmk
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.nber.org/papers/w12309.pdf (application/pdf)

Related works:
Working Paper: Collateralized borrowing and life-cycle portfolio choice (2006)
Working Paper: Collateralized Borrowing And Life-Cycle Portfolio Choice (2006)
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:nbr:nberwo:12309

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w12309

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().