Life-Cycle Portfolio Choice, the Wealth Distribution and Asset Prices

37 Pages Posted: 19 May 2010 Last revised: 12 Sep 2015

See all articles by Felix Kubler

Felix Kubler

University of Zurich; Swiss Finance Institute

Karl Schmedders

University of Zurich

Date Written: September 8, 2015

Abstract

This paper examines a canonical stochastic overlapping generations model with dynamically complete markets. Belief differences lead agents to place bets against each other and so wealth shifts across agents and across generations. Such changes in the wealth distribution strongly affect prices of long-lived assets since older generations have a lower propensity to save than younger generations. Contrary to the prices of long-lived assets, prices of short-lived assets are much less affected by the wealth distribution. Therefore, belief heterogeneity and life-cycle concerns are major forces contributing to the large gap between the volatility of stock returns and of the risk-free rate found in U.S. data.

Keywords: OLG economy, heterogeneous beliefs, wealth distribution, asset price volatility

JEL Classification: D53, E21, G11, G12

Suggested Citation

Kubler, Felix E. and Schmedders, Karl, Life-Cycle Portfolio Choice, the Wealth Distribution and Asset Prices (September 8, 2015). Swiss Finance Institute Research Paper No. 10-21. Available at SSRN: https://ssrn.com/abstract=1611722 or http://dx.doi.org/10.2139/ssrn.1611722

Felix E. Kubler

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Karl Schmedders (Contact Author)

University of Zurich ( email )

Moussonstrasse 15
Zürich, CH-8044
Switzerland
+41 (0)44 634 3770 (Phone)

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