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Borrowing costs and the demand for equity over the life cycle Author info | Abstract | Publisher info | Download info | Related research | Statistics Steven J. Davis
Felix Kubler
Paul Willen
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We construct a life-cycle model that delivers realistic behavior for both equity holdings and borrowings. The key model ingredient is a wedge between the cost of borrowing and the risk-free investment return. Borrowing can either raise or lower equity demand, depending on the cost of borrowing. A borrowing rate equal to the expected return on equity — which we show roughly matches the data — minimizes the demand for equity. Alternative models with no borrowing or limited borrowing at the risk-free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings.
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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number
05-7.
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Date of creation: 2005Date of revision:
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Keywords: Households - Economic aspects Investments Other versions of this item:
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