Why Do Household Portfolio Shares Rise in Wealth?

58 Pages Posted: 30 Aug 2010 Last revised: 26 Sep 2010

See all articles by Jessica A. Wachter

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Motohiro Yogo

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

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Date Written: August 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.

Suggested Citation

Wachter, Jessica A. and Yogo, Motohiro, Why Do Household Portfolio Shares Rise in Wealth? (August 2010). NBER Working Paper No. w16316, Available at SSRN: https://ssrn.com/abstract=1667347

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

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Motohiro Yogo

Princeton University - Department of Economics ( email )

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