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Optimal portfolios with wealth-varying risk aversion in the neoclassical growth model

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  • Espino Emilio

    (Universidad Torcuato Di Tella, Economics, Saenz Valiente 1010, Buenos Aires, C1428BIJ, Argentina)

Abstract

This paper provides a rationale for fixed portfolios that exhibit fund separation as an optimal general equilibrium strategy when heterogeneous investors have wealth-varying relative risk aversion in the context of the standard stochastic neoclassical growth model. Agents’ wealth heterogeneity varies endogenously through time. Preferences exhibit linear risk tolerance with respect to consumption, consumption and labor are separable and the momentary utility function for leisure is isoelastic. Production possibilities are represented by J neoclassical technologies which are subject to shocks. I show that any competitive equilibrium allocation that is Pareto optimal can be supported by means of constant portfolios with only a few assets: a mutual fund of stocks, a consol and two other securities perfectly linearly correlated with aggregate labor income and the wage rate. Remarkably, this result holds in spite of the changing degree of agents’ heterogeneity and wealth-varying relative risk aversion, both stemming from movements in the stock of capital.

Suggested Citation

  • Espino Emilio, 2014. "Optimal portfolios with wealth-varying risk aversion in the neoclassical growth model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-26, January.
    • Handle: RePEc:bpj:bejmac:v:14:y:2014:i:1:p:26:n:5
    DOI: 10.1515/bejm-2012-0044
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    References listed on IDEAS

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    1. Emilio Espino & Thomas Hintermaier, 2009. "Asset trading volume in a production economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(2), pages 231-258, May.
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    5. Krueger, Dirk & Lustig, Hanno, 2010. "When is market incompleteness irrelevant for the price of aggregate risk (and when is it not)?," Journal of Economic Theory, Elsevier, vol. 145(1), pages 1-41, January.
    6. Atkeson, Andrew & Ogaki, Masao, 1996. "Wealth-varying intertemporal elasticities of substitution: Evidence from panel and aggregate data," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 507-534, December.
    7. David N. DeJong & Emilio Espino, 2011. "The cyclical behavior of equity turnover," Quantitative Economics, Econometric Society, vol. 2(1), pages 99-133, March.
    8. Espino, Emilio, 2007. "Equilibrium portfolios in the neoclassical growth model," Journal of Economic Theory, Elsevier, vol. 137(1), pages 673-687, November.
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