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Collateralized Borrowing And Life-Cycle Portfolio Choice

Paul Willen and Felix Kubler ()

No 578, 2006 Meeting Papers from Society for Economic Dynamics

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

Keywords: Portfolio Choice; Collateral (search for similar items in EconPapers)
JEL-codes: G11 E21 (search for similar items in EconPapers)
Date: 2006-12-03
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Working Paper: Collateralized borrowing and life-cycle portfolio choice (2006) Downloads
Working Paper: Collateralized Borrowing and Life-Cycle Portfolio Choice (2006) Downloads
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