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Collateralized Borrowing And Life-Cycle Portfolio Choice

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Author Info
Paul Willen () (Federal Reserve Bank of Boston)
Felix Kubler

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Abstract

We examine the effects of collateralized borrowing in a realistically parameterized life-cycle portfolio choice problem. We provide basic intuition in a two-period model and then solve a multi-period model computationally. Our analysis provides insights into life-cycle portfolio choice relevant for researchers in macroeconomics and finance. In particular, we show that standard models with unlimited borrowing at the riskless rate dramatically overstate the gains to holding equity when compared with collateral constrained models. Our results do not depend on the specification of the collateralized borrowing regime; the gains to trading equity remain relatively small even with the unrealistic assumption of unlimited leverage. We argue that our results strengthen the role of borrowing constraints in explaining the portfolio participation puzzle

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Publisher Info
Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 578.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:578

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Related research
Keywords: Portfolio Choice; Collateral;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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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. Raffaele Miniaci & Sergio Pastorello, 2008. "Mean-Variance Econometric Analysis of Household Portfolios," Working Papers 0807, University of Brescia, Department of Economics. [Downloadable!]
  2. Henrekson, Magnus & Sanandaji, Tino, 2008. "Entrepreneurship and the Theory of Taxation," Working Paper Series 732, Research Institute of Industrial Economics, revised 19 Aug 2009. [Downloadable!]
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