Precautionary Portfolio Behavior from a Life-Cycle Perspective

Posted: 5 May 1998

See all articles by Carol C. Bertaut

Carol C. Bertaut

Board of Governors of the Federal Reserve System

Michael Haliassos

Goethe University Frankfurt - House of Finance; Goethe University Frankfurt - Faculty of Economics and Business Administration; CEPR; NETSPAR

Date Written: January 1995

Abstract

The literature on asset accumulation by households draws a sharp distinction between "short-run" precautionary motives to buffer annual consumption from annual labor income shocks, and "long-run" life cycle considerations under labor income certainty. However, empirical estimates of the persistence of shocks to annual incomes imply that households are subject to considerable career uncertainty. We study long-run precautionary motives for life-cycle wealth accumulation and portfolio choice. We compute optimal portfolios under three sources of uncertainty (stock returns, incomes, and lifespan), and explore the separate contributions of several key factors for mean and median asset holdings, including education, risk aversion, household heterogeneity, utility from bequests, time preference, and variance and serial correlation of income shocks. Numerical solutions for households in three education groups are compared with data from the most recent and comprehensive source, the 1992 Survey of Consumer Finances.

JEL Classification: G11, E21

Suggested Citation

Bertaut, Carol C. and Haliassos, Michael, Precautionary Portfolio Behavior from a Life-Cycle Perspective (January 1995). Available at SSRN: https://ssrn.com/abstract=7201

Carol C. Bertaut

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Michael Haliassos (Contact Author)

Goethe University Frankfurt - House of Finance

Theodor-W.-Adorno-Platz 3
PF H32
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
PF H32
Frankfurt am Main, D-60323
Germany

CEPR

London
United Kingdom

NETSPAR ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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