Countercyclical Labor Income Risk and Portfolio Choices over the Life-Cycle
57 Pages Posted: 13 May 2016 Last revised: 28 Jan 2019
Date Written: January 27, 2019
I structurally estimate a life-cycle model of portfolio choices that incorporates the relationship between stock market returns and the skewness of idiosyncratic income shocks. The cyclicality of skewness can explain (i) low stock market participation among young households with modest financial wealth and (ii) why the equity share of participants slightly increases until retirement. With an estimated relative risk aversion of 5 and yearly participation cost of $290, the model matches the evolution of wealth, of participation and of the conditional equity share over the life-cycle. Nonetheless, I find that cyclical skewness increases the equity premium by at most 0.5%.
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: Suggested Citation