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Household Finance: Education, Permanent Income and Portfolio Choice

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  • Russell Cooper
  • Guozhong Zhu

Abstract

This paper studies household financial choices: why are these decisions dependent on the education level of the household? A life cycle model is constructed to understand a rich set of facts about decisions of households with different levels of education attainment regarding stock market participation, the stock share in wealth, the stock adjustment rate and wealth-income ratio. Model parameters, including preferences, the cost of stock market participation and portfolio adjustment costs, are estimated to match the financial decisions of different education groups. Based on the estimated model, education matters through two channels: the mean of income and the discount factor.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19455.

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Date of creation: Sep 2013
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Handle: RePEc:nbr:nberwo:19455

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  1. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 29-42, February.
  2. 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.
  3. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Jessica A. Wachter & Motohiro Yogo, 2010. "Why Do Household Portfolio Shares Rise in Wealth?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 23(11), pages 3929-3965, November.
  5. Starr-McCluer, Martha, 1996. "Health Insurance and Precautionary Savings," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 285-95, March.
  6. James P. Smith, 2003. "Trends and Projections in Income Replacement during Retirement," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 21(4), pages 755-782, October.
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