Collateralized Borrowing and Life-Cycle Portfolio Choice

48 Pages Posted: 17 Mar 2006

See all articles by Paul Willen

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Felix Kubler

University of Zurich; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006


We examine the effects of collateralized borrowing in a realistically parameterized life-cycle portfolio choice problem. We provide basic intuition in a two-period model and then solve a multi-period model computationally. Our analysis provides insights into life-cycle portfolio choice relevant for researchers in macroeconomics and finance. In particular, we show that standard models with unlimited borrowing at the riskless rate dramatically overstate the gains to holding equity when compared with collateral-constrained models. Our results do not depend on the specification of the collateralized borrowing regime: the gains to trading equity remain relatively small even with the unrealistic assumption of unlimited leverage. We argue that our results strengthen the role of borrowing constraints in explaining the portfolio participation puzzle, that is, why most investors do not own stock.

Keywords: portfolio choice, collateral

JEL Classification: G11,E21

Suggested Citation

Willen, Paul S. and Kubler, Felix E., Collateralized Borrowing and Life-Cycle Portfolio Choice (March 2006). FRB of Boston Working Paper No. 06-4; AFA 2007 Chicago Meetings Paper. Available at SSRN: or

Paul S. Willen (Contact Author)

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Felix E. Kubler

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics