Stock Market Participation, Portfolio Choice and Pensions over the Life-Cycle

Abstract

The empirical evidence on stock market participation and portfolio choice de…es the predictions of standard life-cycle theory. In this paper we develop and estimate a model of portfolio choice that can account for the limited stock market participation and substantial portfolio diversi…cation seen in the data. We present three realistic extensions to the basic framework: per period …xed costs, public pension provision, and a small chance of a disastrous event in the stock market. The estimated model is able to explain observed patterns at reasonable wealth levels, while keeping to a fairly simple framework. We demonstrate that it is no longer necessary to assume counterfactual asset holdings, heterogeneity in preferences, or implausible parameter values, in order to match key …nancial statistics.

Limited Stock Market Participation Among Renters and Home Owners

“…In the literature on life-cycle portfolio choice, essentially three mechanisms for limited stock market participation have been proposed. Those mechanisms are modified risk properties of labor income (Lynch and Tan, 2007;Benzoni, Collin-Dufresne, and Goldstein, 2007;Storesletten, Telmer, and Yaron, 2007), the existence of rare disastrous events (Cocco, Gomes, and Maenhout, 2005;Ball, 2008), and preference heterogeneity (Gomes and Michaelides, 2005). However, the all of the proposed mechanisms are difficult to establish in the sense of statistical significance (e.g.…”

“…In terms of its financial portfolio choice features the model resembles Viceira (2001), Cocco, Gomes, and Maenhout (2005), Michaelides (2005), Alan (2006), Polkovnichenko (2007) and Ball (2008), among others. In terms of its housing features, the model resembles Cocco (2005), Hu (2005), Yao andZhang (2005), van Hemert (2010).…”

Labor Market Uncertainty and Portfolio Choice Puzzles

“…For simplicity, we abstract from the general equilibrium aspect by assuming exogenous average rates of return to both stocks and bonds.11Ball (2008) analyzes financial investments for different levels of the social security benefit. He finds that the generosity of the social security system has little impact on portfolio choice.…”

A News-Utility Theory for Inattention and Delegation in Portfolio Choice

“…While most of the existing applications and evidence consider the static model of Rabin (2006, 2007), I incorporate the preferences into a fully dynamic and 10 An incomplete list of papers includes Berkelaar, Kouwenberg, and Post (2004) and Gomes (2003) studying prospect theory; Gomes and Michaelides (2003) assuming habit formation; Haliassos and Michaelides (2003) and Campanale, Fugazza, and Gomes (2015) assuming illiquidities; Gomes and Michaelides (2005) assuming Epstein-Zin preferences, stock-market entry costs, and heterogeneity in risk aversion; Gormley, Liu, and Zhou (2010) and Ball (2008) assuming disaster risk and participation costs; and Campanale (2009) assuming the existence of participation costs and an underdiversified portfolio. 11 Heidhues andKoszegi (2008, 2014) and Herweg and Mierendorff (2013) explored the implications for consumer pricing, which were tested by Karle, Kirchsteiger, andPeitz (2011), Herweg, Muller, andWeinschenk (2010) did so for principal-agent contracts, and Eisenhuth (2012) did so for mechanism design.…”