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

  • Felix KUBLER

    (University of Zurich (ISB) and Swiss Finance Insitute)

  • Karl SCHMEDDERS

    (University of Zurich (IOR) and Swiss Finance Insitute)

In this paper we consider a canonical stochastic overlapping generations economy with sequentially complete markets. We examine how aggregate and individual shocks translate to changes in the distribution of wealth and how these movements in the wealth distribution affect asset prices and the interest rate. We show that effects are generally small if agents have identical beliefs but that differences in opinion lead to large movements in the wealth distribution. The interplay of belief heterogeneity and life-cycle savings motives creates very large movements of asset prices and can poten- tially generate realistic moments of asset returns.

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 10-21.

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Length: 41 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:chf:rpseri:rp1021
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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  1. Kenneth L. Judd & Felix Kubler & Karl Schmedders, 2003. "Asset Trading Volume with Dynamically Complete Markets and Heterogeneous Agents," Journal of Finance, American Finance Association, vol. 58(5), pages 2203-2218, October.
  2. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 323-336.
  3. Kehoe, Timothy J. & Levine, David K. & Mas-Colell, Andreu & Woodford, Michael, 1991. "Gross substitutability in large-square economies," Journal of Economic Theory, Elsevier, vol. 54(1), pages 1-25, June.
  4. Bhattacharya,Rabi & Majumdar,Mukul, 2007. "Random Dynamical Systems," Cambridge Books, Cambridge University Press, number 9780521532723.
  5. Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2002. "Asset pricing with idiosyncratic risk and overlapping generations," Seminar Papers 703, Stockholm University, Institute for International Economic Studies.
  6. Huffman, Gregory W, 1987. "A Dynamic Equilibrium Model of Asset Prices and Transaction Volume," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 138-59, February.
  7. Bhattacharya,Rabi & Majumdar,Mukul, 2007. "Random Dynamical Systems," Cambridge Books, Cambridge University Press, number 9780521825658.
  8. Kubler, Felix & Schmedders, Karl, 2002. "Recursive Equilibria In Economies With Incomplete Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 284-306, April.
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