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Countercyclical Income Risk and Portfolio Choices over the Life-Cycle

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  • Catherine, Sylvain

Abstract

This paper presents a life-cycle model that incorporates the cyclical skewness of labor income shocks. Cyclical skewness can explain the limited stock market participation of households with modest financial wealth and the positive age trend in conditional equity shares. Structural estimation reveals that a relative risk aversion of 5 and a yearly participation cost of $290 fits the US data. Omitting cyclical skewness leads to a three-fold overestimation of participation costs and generates a counterfactual decline of conditional equity shares. As its portfolio implications are smaller for wealthy households, cyclical skewness reduces aggregate demand for equity by only 15%.

Suggested Citation

  • Catherine, Sylvain, 2016. "Countercyclical Income Risk and Portfolio Choices over the Life-Cycle," HEC Research Papers Series 1147, HEC Paris.
    • Handle: RePEc:ebg:heccah:1147
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2778892
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    Cited by:

    1. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    2. Lorenz Meister & Karla Schulze, 2022. "How Shocks Affect Stock Market Participation," DIW Roundup: Politik im Fokus 142, DIW Berlin, German Institute for Economic Research.

    More about this item

    Keywords

    Household finance; Labor income risk; Portfolio choices; Human capital; Life-cycle model; Simulated method of moments;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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