Countercyclical Labor Income Risk and Portfolio Choices over the Life-Cycle

57 Pages Posted: 13 May 2016 Last revised: 28 Jan 2019

See all articles by Sylvain Catherine

Sylvain Catherine

University of Pennsylvania - Finance Department

Date Written: January 27, 2019

Abstract

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

Catherine, Sylvain, Countercyclical Labor Income Risk and Portfolio Choices over the Life-Cycle (January 27, 2019). HEC Paris Research Paper No. FIN-2016-1147. 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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