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Borrowing Constraints, Portfolio Choice, and Precautionary

  • Michael Haliassos

    (University of Cyprus & IMOP [Athens])

  • Christis Hassapis

    (University of Cyprus)

This paper studies effects of two classes of borrowing constraints, collateral- and income-based, on wealth accumulation, portfolio behavior and on precautionary motives. We examine the sensitivity of solutions to tightness of constraints, education level, and preference parameters. The models are calibrated using the 1992 Survey of Consumer Finances. The idea that constrained households engage in less borrowing and less holding of risky assets than desired is borne out for income-based constraints but not necessarily for constraints where assets also serve as collateral. The commonly used nonnegativity constraint on wealth turns out to be a very special case among collateral constraints: not only is constrained consumption equal to income but precautionary wealth holding is zero. Income-based constraints reverse the sign of precautionary effects on holdings of risky assets, and so do relatively tight collateral constraints. The latter reverse the sign of precautionary effects on borrowing, as well. Precautionary effects on wealth holding and on borrowing are smaller when income-based constraints are binding, though not necessarily so for collateral constraints. Results suggest that inclusion of constrained households in a sample of unconstrained ones is quite likely when using standard wealth-level cutoffs for sample splitting, and that it tends to bias empirically observed precautionary effects on wealth downwards. Estimated precautionary effects on risky assets and on borrowing may even be biased towards zero. These findings may help explain the failure of recent empirical studies to uncover sizeable precautionary effects on wealth and on portfolio composition.

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File URL: http://econwpa.repec.org/eps/mac/papers/9809/9809008.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 9809008.

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Length: 36 pages
Date of creation: 22 Sep 1998
Date of revision:
Handle: RePEc:wpa:wuwpma:9809008
Note: Type of Document - Acrobat pdf format; prepared on IBM PC; to print on HP; pages: 36; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Meghir, Costas & Weber, Guglielmo, 1996. "Intertemporal Nonseparability or Borrowing Restrictions? A Disaggregate Analysis Using a U.S. Consumption Panel," Econometrica, Econometric Society, vol. 64(5), pages 1151-81, September.
  2. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March.
  3. Chah, Eun Young & Ramey, Valerie A & Starr, Ross M, 1995. "Liquidity Constraints and Intertemporal Consumer Optimization: Theory and Evidence from Durable Goods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 272-87, February.
  4. Haliassos, Michael, 1994. "On Perfect Foresight Models of a Stochastic World," Economic Journal, Royal Economic Society, vol. 104(424), pages 477-91, May.
  5. Haliassos, Michael & Hassapis, Christis, 2001. "Non-expected Utility, Saving and Portfolios," Economic Journal, Royal Economic Society, vol. 111(468), pages 69-102, January.
  6. Orazio P. Attanasio & James Banks & Sarah Tanner, 2002. "Asset Holding and Consumption Volatility," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 771-792, August.
  7. Marcet, Albert & Singleton, Kenneth J., 1999. "Equilibrium Asset Prices And Savings Of Heterogeneous Agents In The Presence Of Incomplete Markets And Portfolio Constraints," Macroeconomic Dynamics, Cambridge University Press, vol. 3(02), pages 243-277, June.
  8. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  9. Jappelli, Tullio & Pischke, Jörn-Steffen & Souleles, Nicholas, 1995. "Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources," CEPR Discussion Papers 1138, C.E.P.R. Discussion Papers.
  10. James M. Poterba & Andrew A. Samwick, 1995. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 295-372.
  11. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  12. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  13. George M. Constantinides & John B. Donaldson & Rajnish Mehra, 2002. "Junior Can't Borrow: A New Perspective on the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 269-296.
  14. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  15. N. Gregory Mankiw & Stephen P. Zeldes, 1990. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc.
  16. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
  17. Giucca, P. & Jappelli, T. & Terlizzese, D., 1992. "Earning Uncertainty and Precautionary Saving," Papers 161, Banca Italia - Servizio di Studi.
  18. Mervyn A. King & Jonathan I. Leape, 1984. "Wealth and Portfolio Composition: Theory and Evidence," NBER Working Papers 1468, National Bureau of Economic Research, Inc.
  19. Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and credit constraints: International evidence," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 207-238, October.
  20. Bertaut, Carol C. & Haliassos, Michael, 1997. "Precautionary portfolio behavior from a life-cycle perspective," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1511-1542, June.
  21. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  22. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
  23. Christina Paxson, 1990. "Borrowing Constraints and Portfolio Choice," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 535-543.
  24. R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1993. "The Importance of Precautionary Motives in Explaining Individual and Aggregate Saving," NBER Working Papers 4516, National Bureau of Economic Research, Inc.
  25. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
  26. Rob Alessie & Michael Devereux & Guglielmo Weber, 1993. "Intertemporal consumption, durables and liquidity constraints: a cohort analysis," IFS Working Papers W93/07, Institute for Fiscal Studies.
  27. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
  28. repec:fth:pennfi:69 is not listed on IDEAS
  29. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
  30. Christopher D. Carroll, 1991. "Buffer stock saving and the permanent income hypothesis," Working Paper Series / Economic Activity Section 114, Board of Governors of the Federal Reserve System (U.S.).
  31. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 82(3), pages 465-473.
  32. Stephen P. Zeldes, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 275-298.
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