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Life-cycle portfolio choice: The role of heterogeneous under-diversification

  • Campanale, Claudio
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    In life-cycle portfolio choice models it is standard to assume that all agents invest in a diversified stock market index. In contrast recent empirical evidence, summarized in Campbell [2006. Household finance. Journal of Finance 61, 1553-1604] suggests that households' financial portfolios are under-diversified and that there is substantial heterogeneity in diversification. In the present paper I examine the effects of heterogeneous under-diversification in a life-cycle portfolio choice model with uninsurable uncertain earnings and fixed per-period participation costs. The analysis of the model shows that realistically calibrated under-diversification gives an important contribution to the explanation of two key facts of households' portfolio allocation: the moderate stock market participation rate and the moderate stock share for participants.

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    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 33 (2009)
    Issue (Month): 9 (September)
    Pages: 1682-1698

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    Handle: RePEc:eee:dyncon:v:33:y:2009:i:9:p:1682-1698
    Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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