Why Do Household Portfolio Shares Rise in Wealth?

Review of Financial Studies, Vol. 23, No. 11, 2010

AFA 2008 New Orleans Meetings Paper

57 Pages Posted: 16 Mar 2007 Last revised: 13 Dec 2011

See all articles by Jessica A. Wachter

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER); Securities and Exchange Commission

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Multiple version iconThere are 2 versions of this paper

Date Written: August 23, 2010

Abstract

We develop a life-cycle consumption and portfolio choice model in which households have nonhomothetic utility over two types of goods, basic and luxury. We calibrate the model to match the cross-sectional and life-cycle variation in the basic expenditure share in the Consumer Expenditure Survey. The model explains the degree to which the portfolio share in risky assets rises in wealth in the cross-section of households in the Survey of Consumer Finances. For a given household, the portfolio share can fall in response to an increase in wealth, even though the model implies decreasing relative risk aversion.

Keywords: Decreasing relative risk aversion, Engel curves, Life-cycle model, Nonhomothetic utility, Portfolio choice

JEL Classification: D11, D12, G11

Suggested Citation

Wachter, Jessica A. and Yogo, Motohiro, Why Do Household Portfolio Shares Rise in Wealth? (August 23, 2010). Review of Financial Studies, Vol. 23, No. 11, 2010, AFA 2008 New Orleans Meetings Paper, Available at SSRN: https://ssrn.com/abstract=970953

Jessica A. Wachter

University of Pennsylvania - Finance Department ( email )

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Motohiro Yogo (Contact Author)

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