Heterogeneous beliefs, preference for safety, and life-cycle portfolio allocation

Claudio Campanale ()
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Claudio Campanale: Department of Economics, Social Studies, Applied Mathematics and Statistics, and Collegio Carlo Alberto, University of Turin; CeRP

No 100, Working papers from Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino

Abstract: In the present research I examine the implications of heterogeneous beliefs about the expected equity premium in a life-cycle portfolio choice model with background income risk. While subjective and dispersed expectations have become a popular mechanism to explain asset pricing phenomena, introducing belief heterogeneity in a standard framework generates an additional puzzle: the sensitivity of risky asset holdings to expected returns is far greater than observed in the data. Incorporating a direct utility component over the safe asset mitigates this excess sensitivity, producing asset allocation responses that are consistent with empirical evidence. The extended model also replicates realistic patterns of stock market participation and conditional risky shares across wealth and age profiles.

Keywords: Portfolio choice; Preference for Safety; Life-cycle; Heterogeneous Beliefs (search for similar items in EconPapers)
JEL-codes: E21 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2025-11
New Economics Papers: this item is included in nep-dcm and nep-upt
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