Advanced Search
MyIDEAS: Login

Life-cycle stock market participation in taxable and tax-deferred accounts

Contents:

Author Info

  • Zhou, Jie
Registered author(s):

Abstract

The stock market participation patterns differ significantly in taxable (TAs) and tax-deferred accounts (TDAs). This paper develops a quantitative life-cycle model to study the optimal stock market participation choice for households with assets in both TAs and TDAs. We find that differential costs of stock market participation in the two accounts explain the higher participation rate in TDAs early in life relative to TAs and the increasing stock market participation rate in TAs over the life cycle. We also show that the differential tax treatment between TAs and TDAs is responsible for the decline in the participation rate in TDAs late in life, while the basis-reset provision of the tax code is not quantitatively important.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S016518891200108X
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 36 (2012)
Issue (Month): 11 ()
Pages: 1814-1829

as in new window
Handle: RePEc:eee:dyncon:v:36:y:2012:i:11:p:1814-1829

Contact details of provider:
Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Portfolio choice; Stock market participation; Entry costs; Tax-deferred accounts;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Gomes, Francisco J & Michaelides, Alexander, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," CEPR Discussion Papers 4853, C.E.P.R. Discussion Papers.
  2. Carroll, Christopher D. & Samwick, Andrew A., 1997. "The nature of precautionary wealth," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 41-71, September.
  3. Thomas A. Becker, 2010. "Outstanding Debt and the Household Portfolio," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2900-2934, July.
  4. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
  5. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, 04.
  6. Monica Paiella, 2001. "Limited financial market participation: a transaction cost-based explanation," IFS Working Papers W01/06, Institute for Fiscal Studies.
  7. John Y. Campbell & Luis M. Viceira, 1998. "Consumption and Portfolio Decisions When Expected Returns Are Time Varying," Harvard Institute of Economic Research Working Papers 1835, Harvard - Institute of Economic Research.
  8. Robert M. Dammon & Chester S. Spatt & Harold H. Zhang, 2004. "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing," Journal of Finance, American Finance Association, vol. 59(3), pages 999-1037, 06.
  9. Sule Alan, 2005. "Entry Costs and Stock Market Participation Over the Life Cycle," Working Papers 2005_1, York University, Department of Economics.
  10. Haliassos, Michalis & Michaelides, Alexander, 2001. "Portfolio Choice and Liquidity Constraints," CEPR Discussion Papers 2822, C.E.P.R. Discussion Papers.
  11. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
  12. Campanale, Claudio, 2009. "Life-cycle portfolio choice: The role of heterogeneous under-diversification," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1682-1698, September.
  13. Ellen R. McGrattan & Edward C. Prescott, 2003. "Average Debt and Equity Returns: Puzzling?," Levine's Working Paper Archive 506439000000000367, David K. Levine.
  14. Ravi Jagannathan & Narayana R. Kocherlakota, 1996. "Why should older people invest less in stock than younger people?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 11-23.
  15. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
  16. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  17. Mariacristina deNardi, 2000. "Wealth Inequality and Intergenerational Links," Econometric Society World Congress 2000 Contributed Papers 0547, Econometric Society.
  18. Barber, Brad M. & Odean, Terrance, 2004. "Are individual investors tax savvy? Evidence from retail and discount brokerage accounts," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 419-442, January.
  19. Steven J. Davis & Felix Kubler & Paul Willen, 2005. "Borrowing costs and the demand for equity over the life cycle," Working Papers 05-7, Federal Reserve Bank of Boston.
  20. Jennifer Huang, 2008. "Taxable and Tax-Deferred Investing: A Tax-Arbitrage Approach," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2173-2207, September.
  21. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 3-95, Wharton School Rodney L. White Center for Financial Research.
  22. Mark Huggett & Juan Carols Parra, 2006. "How Well Does the US Social Insurance System Provide Social Insurance?," Working Papers gueconwpa~06-06-11, Georgetown University, Department of Economics.
  23. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  24. R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1994. "The Importance of Precautionary Motives in Explaining Individual and Aggregate Saving," NBER Working Papers 4516, National Bureau of Economic Research, Inc.
  25. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc.
  26. Huggett, Mark & Ventura, Gustavo, 2000. "Understanding why high income households save more than low income households," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 361-397, April.
  27. Francisco Gomes & Alexander Michaelides & Valery Polkovnichenko, 2009. "Optimal Savings with Taxable and Tax-Deferred Accounts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 718-735, October.
  28. Zhou, Jie, 2009. "The asset location puzzle: Taxes matter," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 955-969, April.
  29. Joulfaian, David & Richardson, David, 2001. "Who Takes Advantage of Tax-Deferred Savings Programs? Evidence from Federal Income Tax Data," National Tax Journal, National Tax Association, vol. 54(n. 3), pages 669-88, September.
  30. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  31. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
  32. Ventura, Gustavo, 1999. "Flat tax reform: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1425-1458, September.
  33. Annette Vissing-Jorgensen, 2002. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," NBER Working Papers 8884, National Bureau of Economic Research, Inc.
  34. Luis M. Viceira, 1999. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," NBER Working Papers 7409, National Bureau of Economic Research, Inc.
  35. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
  36. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
  37. Fratantoni, Michael C, 2001. "Homeownership, Committed Expenditure Risk, and the Stockholding Puzzle," Oxford Economic Papers, Oxford University Press, vol. 53(2), pages 241-59, April.
  38. Jerome Adda & Russell W. Cooper, 2003. "Dynamic Economics: Quantitative Methods and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012014.
  39. Barclay, Michael J. & Pearson, Neil D. & Weisbach, Michael S., 1998. "Open-end mutual funds and capital-gains taxes," Journal of Financial Economics, Elsevier, vol. 49(1), pages 3-43, July.
  40. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
  41. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Fischer, Marcel & Kraft, Holger & Munk, Claus, 2013. "Asset allocation over the life cycle: How much do taxes matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2217-2240.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:36:y:2012:i:11:p:1814-1829. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.