GHH Preferences on Households' Portfolio Choices: Theoretical Implications and Empirical Evidence

33 Pages Posted: 6 Feb 2019 Last revised: 10 Apr 2019

See all articles by Zongwu Cai

Zongwu Cai

University of North Carolina at Charlotte

Haiyong Liu

East Carolina University - Department of Economics

Xuan Liu

East Carolina University - Department of Economics

Date Written: March 13, 2019

Abstract

This paper explores theoretical implications and empirical evidence of GHH preferences [Greenwood et al. (2008)] over portfolio choices. First, we analytically solve a parsimonious life-cycle portfolio choice model with the GHH preferences and endogenous labor-leisure choice and obtain a closed-form solution. Second, our analytical solution identifies four effects due to the GHH preferences (through endogenous labor-leisure choices) on risky shares; and it shows that two net effects hinge on the value of one key structural parameter. Third, we empirically test main theoretical predictions with the Panel Study of Income Dynamics data. Overall, the estimation results provide empirical evidence in support of GHH preferences. Thus, our analysis provides a definitive answer to one of the most fundamental, yet highly contentious, questions in quantitative macroeconomic analysis: the choice of utility functions in a representative agent model.

Keywords: Macro Model Assumption Testing; GHH Preferences; Portfolio Choice; Labor Income; Household Level Data

JEL Classification: D91; E21; G11

Suggested Citation

Cai, Zongwu and Liu, Haiyong and Liu, Xuan, GHH Preferences on Households' Portfolio Choices: Theoretical Implications and Empirical Evidence (March 13, 2019). Available at SSRN: https://ssrn.com/abstract=3319315 or http://dx.doi.org/10.2139/ssrn.3319315

Zongwu Cai

University of North Carolina at Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States
704-687-2650 (Phone)

Haiyong Liu

East Carolina University - Department of Economics ( email )

Brewster Building
Greenville, NC 27858
United States

Xuan Liu (Contact Author)

East Carolina University - Department of Economics ( email )

Brewster Building
Greenville, NC 27858
United States

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