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Heterogeneous beliefs, preference for safety, and life-cycle portfolio allocation

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  • Campanale Claudio

    (Department of Economics, Social Studies, Applied Mathematics and Statistics, and Collegio Carlo Alberto, University of Turin; CeRP)

Abstract

In the present research I examine the implications of heterogeneous beliefs about the expected equity premium in a life-cycle portfolio choice model with background income risk. While subjective and dispersed expectations have become a popular mechanism to explain asset pricing phenomena, introducing belief heterogeneity in a standard framework generates an additional puzzle: the sensitivity of risky asset holdings to expected returns is far greater than observed in the data. Incorporating a direct utility component over the safe asset mitigates this excess sensitivity, producing asset allocation responses that are consistent with empirical evidence. The extended model also replicates realistic patterns of stock market participation and conditional risky shares across wealth and age profiles.

Suggested Citation

  • Campanale Claudio, 2025. "Heterogeneous beliefs, preference for safety, and life-cycle portfolio allocation," Working papers 100, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    • Handle: RePEc:tur:wpapnw:100
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    File URL: https://www.bemservizi.unito.it/repec/tur/wpapnw/m100.pdf
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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