Asset Market Participation and Portfolio Choice Over the Life-Cycle

SAFE Working Paper No. 115

54 Pages Posted: 15 Sep 2015

See all articles by Andreas Fagereng

Andreas Fagereng

Statistics Norway

Charles Gottlieb

University of St. Gallen - SEPS: Economics and Political Sciences; University of Oxford - Nuffield College of Medicine

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF)

Multiple version iconThere are 4 versions of this paper

Date Written: June 2015

Abstract

We study the life cycle of portfolio allocation following for 15 years a large random sample of Norwegian households using error-free data on all components of households’ investments drawn from the Tax Registry. Both, participation in the stock market and the portfolio share in stocks, have important life cycle patterns. Participation is limited at all ages but follows a hump-shaped profile which peaks around retirement; the share invested in stocks among the participants is high and flat for the young but investors start reducing it as retirement comes into sight. Our data suggest a double adjustment as people age: a rebalancing of the portfolio away from stocks as they approach retirement, and stock market exit after retirement. Existing calibrated life cycle models can account for the first behavior but not the second. We show that incorporating in these models a reasonable per period participation cost can generate limited participation among the young but not enough exit from the stock market among the elderly. Adding also a small probability of a large loss when investing in stocks, produces a joint pattern of participation and of the risky asset share that resembles the one observed in the data. A structural estimation of the relevant parameters that target simultaneously the portfolio, participation and asset accumulation age profiles of the model reveals that the parameter combination that fits the data best is one with a relatively large risk aversion, small participation cost and a yearly large loss probability in line with the frequency of stock market crashes in Norway.

Suggested Citation

Fagereng, Andreas and Gottlieb, Charles and Guiso, Luigi, Asset Market Participation and Portfolio Choice Over the Life-Cycle (June 2015). SAFE Working Paper No. 115. Available at SSRN: https://ssrn.com/abstract=2660160 or http://dx.doi.org/10.2139/ssrn.2660160

Andreas Fagereng

Statistics Norway ( email )

Postboks 8131 Dep, 0033 Oslo
Oslo, Oslo 0033
Norway
+47 2109 4700 (Phone)

HOME PAGE: http://sites.google.com/site/andreasfagereng/

Charles Gottlieb (Contact Author)

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

Rosenbergstrasse 51
St. Gallen, St. Gallen CH-9000
Switzerland

University of Oxford - Nuffield College of Medicine ( email )

New Road
Oxford, OX1 1NF
United Kingdom

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana 62
Rome, 00187
Italy
+39 06 4792 4858 (Phone)
+39 06 4792 4872 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Register to save articles to
your library

Register

Paper statistics

Downloads
221
rank
37,111
Abstract Views
957
PlumX Metrics