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

Listed author(s):
  • 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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File URL: https://economicdynamics.org/meetpapers/2012/paper_536.pdf
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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
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

Web page: http://www.EconomicDynamics.org/
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  1. Kjetil Storesletten & Chris Telmer & Amir Yaron, "undated". "Asset pricing with idiosyncratic risk and overlapping generations," GSIA Working Papers 226, Carnegie Mellon University, Tepper School of Business.
  2. Kubler, Felix & Schmedders, Karl, 2002. "Recursive Equilibria In Economies With Incomplete Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 284-306, April.
  3. Huffman, Gregory W, 1987. "A Dynamic Equilibrium Model of Asset Prices and Transaction Volume," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 138-159, February.
  4. Kenneth L. Judd & Felix Kubler & Karl Schmedders, 2003. "Asset Trading Volume with Dynamically Complete Markets and Heterogeneous Agents," Journal of Finance, American Finance Association, vol. 58(5), pages 2203-2218, October.
  5. Kehoe, Timothy J. & Levine, David K. & Mas-Colell, Andreu & Woodford, Michael, 1991. "Gross substitutability in large-square economies," Journal of Economic Theory, Elsevier, vol. 54(1), pages 1-25, June.
  6. Bhattacharya,Rabi & Majumdar,Mukul, 2007. "Random Dynamical Systems," Cambridge Books, Cambridge University Press, number 9780521825658, December.
  7. Bhattacharya,Rabi & Majumdar,Mukul, 2007. "Random Dynamical Systems," Cambridge Books, Cambridge University Press, number 9780521532723, December.
  8. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 92(2), pages 323-336.
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