Portfolio Choice and Precautionary Savings
EMLYON Business School; Center for Research on Pensions and Welfare Policies (CeRP)
University of Rome II - Faculty of Economics
Economics Bulletin, Vol. 31, No. 2
We study the effect on savings of an increase in the capital risk of the investment opportunities when the representative consumer is allowed to optimally choose her portfolio. Sandmo (1970) and Levhari and Srinivasan (1969) prove that individuals with high risk-aversion and time-separable, power utility increase their optimal savings when capital risk increases holding constant the expected return of the risky asset. We obtain the opposite effect when the consumer chooses her portfolio allocation optimally.
Number of Pages in PDF File: 9
Keywords: precautionary saving, capital risk
JEL Classification: D91, E21, G11
Date posted: July 13, 2011
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