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Household Finance: Education, Permanent Income and Portfolio Choice

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  • Russell Cooper
  • Guozhong Zhu

Abstract

This paper studies household financial choices: why are these decisions dependent on the education level of the household? A life cycle model is constructed to understand a rich set of facts about decisions of households with different levels of education attainment regarding stock market participation, the stock share in wealth, the stock adjustment rate and wealth-income ratio. Model parameters, including preferences, the cost of stock market participation and portfolio adjustment costs, are estimated to match the financial decisions of different education groups. Based on the estimated model, education matters through two channels: the mean of income and the discount factor.

Suggested Citation

  • Russell Cooper & Guozhong Zhu, 2013. "Household Finance: Education, Permanent Income and Portfolio Choice," NBER Working Papers 19455, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19455
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    File URL: http://www.nber.org/papers/w19455.pdf
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    References listed on IDEAS

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    1. Annette Vissing-Jorgensen, 2002. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," NBER Working Papers 8884, National Bureau of Economic Research, Inc.
    2. Starr-McCluer, Martha, 1996. "Health Insurance and Precautionary Savings," American Economic Review, American Economic Association, vol. 86(1), pages 285-295, March.
    3. Philippe Weil, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 29-42.
    4. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    5. Jessica A. Wachter & Motohiro Yogo, 2010. "Why Do Household Portfolio Shares Rise in Wealth?," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 3929-3965, November.
    6. James P. Smith, 2003. "Trends and Projections in Income Replacement during Retirement," Journal of Labor Economics, University of Chicago Press, vol. 21(4), pages 755-782, October.
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    Cited by:

    1. Kosuke Aoki & Alexander Michaelides & Kalin Nikolov, 2016. "Household Portfolios in a Secular Stagnation World: Evidence from Japan," Bank of Japan Working Paper Series 16-E-4, Bank of Japan.
    2. Urvi Neelakantan & Felicia Ionescu & Kartik Athreya, 2015. "Learn Now, Save Later: College and Household Portfolios," 2015 Meeting Papers 804, Society for Economic Dynamics.
    3. Cobb-Clark, Deborah A. & Kassenboehmer, Sonja C. & Sinning, Mathias G., 2016. "Locus of control and savings," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 113-130.
    4. Russell Cooper & Guozhong Zhu, 2016. "Household Finance over the Life-Cycle: What does Education Contribute?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 63-89, April.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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