This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Borrowing Costs and the Demand for Equity Over the Life Cycle

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Steven J. Davis
Felix Kubler
Paul Willen

Additional information is available for the following registered author(s):

Abstract

We analyze consumption and portfolio behavior in a life-cycle model with realistic borrowing costs and income processes. We show that even a small wedge between borrowing costs and the risk-free return dramatically shrinks the demand for equity. When the cost of borrowing equals or exceeds the expected return on equity the relevant case according to the data households hold little or no equity during much of the life cycle. The model also implies that the correlation between consumption growth and equity returns is low at all ages, and that risk aversion estimates based on the standard excess return formulation of the consumption Euler Equation are greatly upward biased. The demand for equity in the model is non-monotonic in borrowing costs and risk aversion, and the standard deviation of marginal utility growth is an order of magnitude smaller than the Sharpe ratio.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w9331.pdf
File Format: application/pdf
File Function:
Download Restriction: Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html.

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.

Publisher Info
Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9331.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:nbr:nberwo:9331

Note: AP EFG
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: ().

Related research
Keywords:

Other versions of this item:

Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

This paper has been announced in the following NEP Reports:

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.:
  1. Sule Alan, 2004. "Precautionary Wealth and Portfolio Allocation: Evidence from Canadian Microdata," Social and Economic Dimensions of an Aging Population Research Papers 117, McMaster University. [Downloadable!]
  2. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April. [Downloadable!] (restricted)
    Other versions:
  3. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February. [Downloadable!] (restricted)
  4. Bisin, Alberto & Gottardi, Piero, 1999. "Competitive Equilibria with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 87(1), pages 1-48, July. [Downloadable!] (restricted)
    Other versions:
  5. Campbell, John Y., 1999. "Asset prices, consumption, and the business cycle," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 19, pages 1231-1303 Elsevier. [Downloadable!] (restricted)
    Other versions:
  6. David Altig & Steve J. Davis, 1989. "The timing of intergenerational transfers, tax policy, and aggregate savings," Working Paper 8917, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  7. Orazio P. Attanasio & James Banks & Sarah Tanner, 2002. "Asset Holding and Consumption Volatility," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 771-792, August. [Downloadable!] (restricted)
    Other versions:
  8. Ellen R. McGrattan & Edward C. Prescott, 2003. "Average Debt and Equity Returns: Puzzling?," American Economic Review, American Economic Association, vol. 93(2), pages 392-397, May. [Downloadable!] (restricted)
    Other versions:
  9. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  10. P. Dubey & J. Geanakoplos & M . Shubik, . "Default and Punishment in General Equilibrium," Department of Economics Working Papers 01-07, SUNY-Stony Brook, Department of Economics. [Downloadable!]
    Other versions:
  11. Alon Brav & George M. Constantinides & Christopher C. Geczy, 2002. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," NBER Working Papers 8822, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Francisco Gomes & Alexander Michaelides, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," Journal of Finance, American Finance Association, vol. 60(2), pages 869-904, 04. [Downloadable!] (restricted)
    Other versions:
  13. N. Gregory Mankiw & Stephen P. Zeldes, 1991. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. 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. [Downloadable!] (restricted)
  15. Michael Haliassos & Alexander Michaelides, 2003. "Portfolio Choice and Liquidity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 143-177, February. [Downloadable!] (restricted)
    Other versions:
  16. Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-67, November. [Downloadable!] (restricted)
  17. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(2), pages 491-533. [Downloadable!] (restricted)
  18. 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. [Downloadable!] (restricted)
  19. George M. Constantinides & John B. Donaldson & Rajnish Mehra, 2002. "Junior Can'T Borrow: A New Perspective On The Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 269-296, February. [Downloadable!] (restricted)
    Other versions:
  20. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August. [Downloadable!] (restricted)
  21. Aiyagari, S. Rao & Gertler, Mark, 1991. "Asset returns with transactions costs and uninsured individual risk," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 311-331, June. [Downloadable!] (restricted)
  22. He, Hua & Modest, David M, 1995. "Market Frictions and Consumption-Based Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 94-117, February. [Downloadable!] (restricted)
  23. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449. [Downloadable!] (restricted)
    Other versions:
  24. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06. [Downloadable!] (restricted)
  25. Bansal, Ravi & Coleman, Wilbur John, II, 1996. "A Monetary Explanation of the Equity Premium, Term Premium, and Risk-Free Rate Puzzles," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1135-71, December. [Downloadable!] (restricted)
  26. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March. [Downloadable!] (restricted)
  27. Stefan Hochguertel, 2003. "Precautionary motives and portfolio decisions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 61-77. [Downloadable!]
  28. Annamaria Lusardi & Ricardo Daniel Cossa & Erin L. Krupka, 2001. "Savings of Young Parents," JCPR Working Papers 229, Northwestern University/University of Chicago Joint Center for Poverty Research. [Downloadable!]
  29. Hochguertel, S., 1997. "Precautionary motives and portfolio decisions," Discussion Paper 55, Tilburg University, Center for Economic Research. [Downloadable!]
  30. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
    Other versions:
  31. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January. [Downloadable!] (restricted)
    Other versions:
  32. Grossman, Sanford J. & Shiller, Robert J., 1982. "Consumption correlatedness and risk measurement in economies with non-traded assets and heterogeneous information," Journal of Financial Economics, Elsevier, vol. 10(2), pages 195-210, July. [Downloadable!] (restricted)
  33. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August. [Downloadable!] (restricted)
  34. Luis M. Viceira, 2001. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," Journal of Finance, American Finance Association, vol. 56(2), pages 433-470, 04. [Downloadable!] (restricted)
    Other versions:
  35. Eric M. Engen & William G. Gale & Cori R. Uccello, 1999. "The Adequacy of Retirement Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1999-2), pages 65-188. [Downloadable!]
  36. Sanford J. Grossman & Robert J. Shiller, 1982. "Consumption Correlatedness and Risk Measurement in Economies with Non trade Assets and Heterogeneous Information," NBER Working Papers 0690, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  37. Luc Arrondel & André Masson, 2002. "Stockholding in France," DELTA Working Papers 2002-09, DELTA (Ecole normale supérieure). [Downloadable!]
  38. John V. Duca & Stuart S. Rosenthal, 1993. "Borrowing constraints, household debt, and racial discrimination in loan markets," Research Paper 9312, Federal Reserve Bank of Dallas.
    Other versions:
Full references

Cited by:
(explanations, 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.)

  1. Bovenberg, A Lans & Uhlig, Harald, 2006. "Pension Systems and the Allocation of Macroeconomic Risk," CEPR Discussion Papers 5949, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Maarten vanRooij & Annamaria Lusardi & Rob Alessie, 2007. "Financial Literacy and Stock Market Participation," Working Papers wp162, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
    Other versions:
  3. Fatih Guvenen, 2005. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," Macroeconomics 0507004, EconWPA. [Downloadable!]
    Other versions:
  4. James X. Sullivan, 2005. "Borrowing during unemployment: unsecured debt as a safety net," Proceedings, Federal Reserve Bank of Chicago, issue Apr. [Downloadable!]
  5. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2004. "Are Americans Saving "Optimally" for Retirement?," NBER Working Papers 10260, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Jaime Ruiz-Tagle, 2006. "Financial Markets Incompleteness and Inequality Over the Life-Cycle," Working Papers Central Bank of Chile 405, Central Bank of Chile. [Downloadable!]
  7. Fatih Guvenen, 2007. "An Empirical Investigation of Labor Income Processes," NBER Working Papers 13394, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Yannis Bilias & Michael Haliassos, 2004. "The Distribution of Gains from Access to Stocks," CSEF Working Papers 125, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  9. Paul Willen & Felix Kubler, 2006. "Collateralized borrowing and life-cycle portfolio choice," Public Policy Discussion Paper 06-4, Federal Reserve Bank of Boston. [Downloadable!]
    Other versions:
  10. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Consumer Bankruptcy: A Fresh Start," American Economic Review, American Economic Association, vol. 97(1), pages 402-418, March.
    Other versions:
  11. Erik Hurst & Paul Willen, 2004. "Social Security and unsecured debt," Public Policy Discussion Paper 04-10, Federal Reserve Bank of Boston. [Downloadable!]
    Other versions:
  12. Fatih Guvenen & Burhanettin Kuruscu, 2007. "A Quantitative Analysis of the Evolution of the U.S. Wage Distribution: 1970-2000," NBER Working Papers 13095, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio choice over the life-cycle when the stock and labor markets are cointegrated," Working Paper Series WP-07-11, Federal Reserve Bank of Chicago. [Downloadable!]
  14. Jeffrey R. Brown & Amy Finkelstein, 2004. "The Interaction of Public and Private Insurance: Medicaid and the Long-Term Care Insurance Market," NBER Working Papers 10989, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Gomes, Francisco J & Michaelides, Alexander, 2007. "Asset Pricing with Limited Risk Sharing and Heterogeneous Agents," CEPR Discussion Papers 6136, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  16. Liran Einav & Amy Finkelstein & Paul Schrimpf, 2007. "The Welfare Cost of Asymmetric Information: Evidence from the U.K. Annuity Market," NBER Working Papers 13228, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Statistics
Access and download statistics

Did you know? IDEAS was launched in September 1997.

This page was last updated on 2008-7-24.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.