GHH Preferences on Households' Portfolio Choices: Theoretical Implications and Empirical Evidence
33 Pages Posted: 6 Feb 2019 Last revised: 10 Apr 2019
Date Written: March 13, 2019
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: Suggested Citation