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Life-cycle stock market participation in taxable and tax-deferred accounts

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  • Zhou, Jie

Abstract

The stock market participation patterns differ significantly in taxable (TAs) and tax-deferred accounts (TDAs). This paper develops a quantitative life-cycle model to study the optimal stock market participation choice for households with assets in both TAs and TDAs. We find that differential costs of stock market participation in the two accounts explain the higher participation rate in TDAs early in life relative to TAs and the increasing stock market participation rate in TAs over the life cycle. We also show that the differential tax treatment between TAs and TDAs is responsible for the decline in the participation rate in TDAs late in life, while the basis-reset provision of the tax code is not quantitatively important.

Suggested Citation

  • Zhou, Jie, 2012. "Life-cycle stock market participation in taxable and tax-deferred accounts," Journal of Economic Dynamics and Control, Elsevier, vol. 36(11), pages 1814-1829.
  • Handle: RePEc:eee:dyncon:v:36:y:2012:i:11:p:1814-1829
    DOI: 10.1016/j.jedc.2012.05.002
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    Cited by:

    1. Fischer, Marcel & Kraft, Holger & Munk, Claus, 2013. "Asset allocation over the life cycle: How much do taxes matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2217-2240.
    2. repec:eee:jfinec:v:126:y:2017:i:3:p:689-712 is not listed on IDEAS

    More about this item

    Keywords

    Portfolio choice; Stock market participation; Entry costs; Tax-deferred accounts;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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