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Analytical Guidance for Fitting Parsimonious Household-Portfolio Models to Data

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  • Sylwia Hubar

    ()
    (University of Exeter Business School, United Kingdom.)

  • Christos Koulovatianos

    ()
    (CREA, Universit├ę de Luxembourg)

  • Jian Li

    ()
    (Goethe University Frankfurt, House of Finance, Germany)

Abstract

Saving rates and household investment in stocks and business equity are all increasing in income and wealth. Introducing subsistence consumption to a common-across-households Epstein-Zin-Weil utility function is up to a quantitative explanation, in the context of stan- dardized parsimonious household-portfolio models with risky income. Closed forms in a sim- pli?fied version of the model, with insurable labor-income risk and no liquidity constraints, reveal that if, (i) risky-asset returns are weakly correlated and, (ii) household resources are expected to grow over time, then poorer households can afford exiting subsistence concerns slowly by saving less and by taking less risk, while holding balanced portfolios.

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File URL: http://wwwfr.uni.lu/content/download/63591/803807/file/2013-16%20-%20Analytical%20Guidance%20for%20Fitting%20Parsimonious%20Household-Portfolio%20Models%20to%20Data.pdf
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Bibliographic Info

Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 13-16.

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Date of creation: 2013
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Handle: RePEc:luc:wpaper:13-16

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Keywords: Epstein-Zin-Weil recursive preferences; subsistence consumption; household-portfolio shares; business equity; wealth inequality;

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