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

Author

Listed:
  • Karl Schmedders

    (University of Zurich and Swiss Finance Institute)

  • Felix Kubler

    (IBF, University of Zurich and Swiss Finance Institute)

Abstract

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.

Suggested Citation

  • Karl Schmedders & Felix Kubler, 2012. "Life-Cycle Portfolio Choice, the Wealth Distribution and Asset Prices," 2012 Meeting Papers 536, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:536
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    References listed on IDEAS

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    Cited by:

    1. Roger Farmer, 2014. "Asset Prices in a Lifecycle Economy," NBER Working Papers 19958, National Bureau of Economic Research, Inc.
    2. Andrew Glover & Jonathan Heathcote & Dirk Krueger & José-Víctor Ríos-Rull, 2020. "Intergenerational Redistribution in the Great Recession," Journal of Political Economy, University of Chicago Press, vol. 128(10), pages 3730-3778.
    3. Stefanie Schraeder, 2016. "Information Processing and Non-Bayesian Learning in Financial Markets," Review of Finance, European Finance Association, vol. 20(2), pages 823-853.
    4. Dan Vu Cao, 2010. "Collateral Shortages, Asset Price And Investment Volatility With Heterogeneous Beliefs," 2010 Meeting Papers 1233, Society for Economic Dynamics.

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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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