Richer earnings dynamics, consumption and portfolio choice over the life cycle

Arbeitspapier

Households face earnings risk which is non-normal and varies by age and over the income distribution. We show that allowing for these rich features of earnings dynamics, in the context of a structurally estimated life-cycle portfolio choice model, helps to rationalize the limited participation of households in the stock market and their low holdings of risky assets. Because households are subject to more background risk than previously considered, the estimated model implies a substantially lower coefficient of risk aversion. We also find renewed support for rule-of-thumb investment strategies under the model with the nonlinear earnings process.

Object Details

• ISBN: 978-92-899-6073-1
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2810

Classification and Topics

• Classification: Wirtschaft ; Portfolio Choice; Investment Decisions ; Asset Pricing; Trading Volume; Bond Interest Rates ; Household Saving; Personal Finance ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Human Capital; Skills; Occupational Choice; Labor Productivity
• Subject: stock ownership ; earnings risk ; wealth accumulation ; household finance ; simulated method of moments

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gálvez, Julio ; Paz Pardo, Gonzalo
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2023

Further information

• DOI: doi:10.2866/790353
• Handle: http://hdl.handle.net/10419/278486
• Last update: 10.03.2025, 11:45 AM CET