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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Stock market participation, portfolio choice and pensions over the life-cycle
Steffan G. Ball
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.


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Steffan G. Ball, Stock market participation, portfolio choice and pensions over the life-cycle, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2008-64, 2009.
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Keywords: Retirement income ; Portfolio management
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