Stock Market Participation and Portfolio Shares Over the Life-Cycle

Abstract

We estimate the life-cycle profile of stock market participation and risky portfolio share.
Our identification approach does not require any assumptions on time or cohort effects, thus
avoiding the classical identification problem. We find that stock market participation is
a hump-shaped function of age, while the conditional risky share is flat until mid-life and
decreases afterwards. We investigate the economic mechanisms driving this behavior, and find empirical support for stock market participation costs, decreasing relative risk aversion,
human capital as a close substitute for bonds, and background risks. We conclude with a
structural life-cycle model that closely replicates these patterns.

Keywords: Life-cycle asset allocation, stock market participation, life-cycle models, human capital

JEL Classification: G5, G11, D14, D15.