Countercyclical Labor Income Risk and Portfolio Choices over the Life Cycle

66 Pages Posted: 13 May 2016 Last revised: 24 Aug 2021

See all articles by Sylvain Catherine

Sylvain Catherine

University of Pennsylvania - Finance Department

Date Written: July 21, 2020

Abstract

I estimate a life-cycle model of portfolio choices that incorporates the relationship between market returns and the skewness of idiosyncratic income shocks. The cyclicality of skewness can explain (i) low stock market participation among young households, (ii) why the equity share of participants slightly increases until retirement and (iii) why renters invest less in stocks than homeowners. With a relative risk aversion of 6 and yearly participation cost of $250, the model matches the evolution of wealth, participation and conditional equity shares over the life cycle. Nonetheless, cyclical skewness increases the equity premium by at most 0.5 percentage points.

Keywords: Household finance, Labor income risk, Portfolio choices, Human capital, Life-cycle model, Simulated method of moments

JEL Classification: G11, G12, D14, D91, J24, H06

Suggested Citation

Catherine, Sylvain, Countercyclical Labor Income Risk and Portfolio Choices over the Life Cycle (July 21, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2778892 or http://dx.doi.org/10.2139/ssrn.2778892

Sylvain Catherine (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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