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Long-Term Government Debt and Household Portfolio Composition

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  • Andreas Tischbirek

Abstract

Formal dynamic analyses of household portfolio choice in the literature focus on holdings of equity and a risk-free asset or bonds of different maturities, neglecting the interdependence of the decisions to invest in equity, short-term and long-term bonds made by households. Data from the Survey of Consumer Finances is used to derive stylised facts about participation in the long-term government-debt market and conditional portfolio shares. These facts are explained with the help of a portfolio-choice model in which investors have access to three assets--equity, long-term debt and a riskless short-term bond--and are exposed to uninsurable idiosyncratic risk through non-financial income, retirement and longevity, as well as aggregate risk through the asset returns. An application shows that the low Treasury returns observed in the US between 2009 and 2013 have quantitatively significant yet transitory effects on the composition of household portfolios. In combination with the observed rise in stock returns, they lead to persistent changes in the participation rate, the conditional portfolio shares and the distribution of wealth.

Suggested Citation

  • Andreas Tischbirek, 2016. "Long-Term Government Debt and Household Portfolio Composition," Cahiers de Recherches Economiques du Département d'économie 16.17, Université de Lausanne, Faculté des HEC, Département d’économie.
  • Handle: RePEc:lau:crdeep:16.17
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    More about this item

    Keywords

    Dynamic Portfolio Choice; Long-Term Government Debt; Asset-Market Participation; Survey of Consumer Finances;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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