Working Paper

Stock market participation, portfolio choice and pensions over the life-cycle

Abstract: The empirical evidence on stock market participation and portfolio choice defies 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 diversification seen in the data. We present three realistic extensions to the basic framework: per period fixed 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 financial statistics.

Keywords: Retirement income; Portfolio management;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2009

Number: 2008-64