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

  • Karl Schmedders

    (University of Zurich and Swiss Finance Institute)

  • Felix Kubler

    (IBF, University of Zurich and Swiss Finance Institute)

In this paper we examine the volatility of asset returns in a canonical stochastic overlapping generations economy with sequentially complete markets. We show that movements in the in- tergenerational wealth distribution strongly affect asset prices since older generations have a lower propensity to save than younger generations. We investigate effects of aggregate shocks on the wealth distribution and show that they are generally small if agents have identical be- liefs. Differences in opinion, however, can lead to large movements in the wealth distribution even when aggregate shocks are absent. The interplay of belief heterogeneity and life-cycle investments leads to considerable changes in the wealth distribution which in turn result in substantial asset price volatility. In fact, the model generates realistic second moments of asset returns.

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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 536.

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Date of creation: 2012
Date of revision:
Handle: RePEc:red:sed012:536
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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