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Precautionary portfolio behavior from a life-cycle perspective

  • Carol C. Bertaut
  • Michael Haliassos

The literature on asset accumulation by households draws a sharp distinction between "short-run" precautionary motives to buffer annual consumption from annual labor income shocks, and "long-run" life cycle considerations under labor income certainty. However, empirical estimates of the persistence of shocks to annual incomes imply that households are subject to considerable career uncertainty. We study long-run precautionary motives for life-cycle wealth accumulation and portfolio choice. We compute optimal portfolios under three sources of uncertainty (stock returns, incomes, and lifespan), and explore the separate contributions of several key factors for mean and median asset holdings, including education, risk aversion, household heterogeneity, utility from bequests, time preference, and variance and serial correlation of income shocks. Numerical solutions for households in three education groups are compared with data from the most recent and comprehensive source, the 1992 Survey of Consumer Finances.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 542.

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Date of creation: 1996
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Handle: RePEc:fip:fedgif:542
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  1. Aiyagari, S. Rao & Gertler, Mark, 1991. "Asset returns with transactions costs and uninsured individual risk," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 311-331, June.
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  15. Alan J. Auerbach & Laurence J. Kotlikoff & Jonathan Skinner, 1981. "The Efficiency Gains from Dynamic Tax Reform," NBER Working Papers 0819, National Bureau of Economic Research, Inc.
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  28. repec:fth:harver:1507 is not listed on IDEAS
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