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Life-Cycle Portfolio Choice, the Wealth Distribution and Asset Prices

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  • Karl Schmedders

    (University of Zurich and Swiss Finance Institute)

  • Felix Kubler

    (IBF, University of Zurich and Swiss Finance Institute)

Abstract

In this paper we examine the volatility of asset returns in a canonical stochastic overlapping generations economy with sequentially complete markets. We show that movements in the in- tergenerational wealth distribution strongly affect asset prices since older generations have a lower propensity to save than younger generations. We investigate effects of aggregate shocks on the wealth distribution and show that they are generally small if agents have identical be- liefs. Differences in opinion, however, can lead to large movements in the wealth distribution even when aggregate shocks are absent. The interplay of belief heterogeneity and life-cycle investments leads to considerable changes in the wealth distribution which in turn result in substantial asset price volatility. In fact, the model generates realistic second moments of asset returns.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 536.

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Date of creation: 2012
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Handle: RePEc:red:sed012:536

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Cited by:
  1. Alp Simsek, 2012. "Speculation and Risk Sharing with New Financial Assets," 2012 Meeting Papers 71, Society for Economic Dynamics.
  2. Glover, Andrew & Heathcote, Jonathan & Krueger, Dirk & Ríos-Rull, José-Víctor, 2011. "Intergenerational Redistribution in the Great Recession," CEPR Discussion Papers 8329, C.E.P.R. Discussion Papers.
  3. Dan Cao, 2011. "Collateral Shortages, Asset Price and Investment Volatility with Heterogeneous Beliefs," Working Papers gueconwpa~11-11-01, Georgetown University, Department of Economics.
  4. Eric Aldrich, 2012. "Trading Volume in General Equilibrium with Complete Markets," 2012 Meeting Papers 36, Society for Economic Dynamics.

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