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Analytical Guidance for Fitting Parsimonious Household-Portfolio Models to Data

Author

Listed:
  • Sylwia Hubar

    () (University of Exeter Business School, United Kingdom.)

  • Christos Koulovatianos

    () (CREA, Université du Luxembourg)

  • Jian Li

    () (Goethe University Frankfurt, House of Finance, Germany)

Abstract

Saving rates and household investment in stocks and business equity are all increasing in income and wealth. Introducing subsistence consumption to a common-across-households Epstein-Zin-Weil utility function is up to a quantitative explanation, in the context of stan- dardized parsimonious household-portfolio models with risky income. Closed forms in a sim- pli?fied version of the model, with insurable labor-income risk and no liquidity constraints, reveal that if, (i) risky-asset returns are weakly correlated and, (ii) household resources are expected to grow over time, then poorer households can afford exiting subsistence concerns slowly by saving less and by taking less risk, while holding balanced portfolios.

Suggested Citation

  • Sylwia Hubar & Christos Koulovatianos & Jian Li, 2013. "Analytical Guidance for Fitting Parsimonious Household-Portfolio Models to Data," CREA Discussion Paper Series 13-16, Center for Research in Economic Analysis, University of Luxembourg.
  • Handle: RePEc:luc:wpaper:13-16
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    File URL: http://wwwfr.uni.lu/content/download/63591/803807/file/2013-16%20-%20Analytical%20Guidance%20for%20Fitting%20Parsimonious%20Household-Portfolio%20Models%20to%20Data.pdf
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    More about this item

    Keywords

    Epstein-Zin-Weil recursive preferences; subsistence consumption; household-portfolio shares; business equity; wealth inequality;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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