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Collateralized Borrowing And Life-Cycle Portfolio Choice

Paul Willen

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

Felix Kubler

University of Zurich; Swiss Finance Institute

March 2006

FRB of Boston Working Paper No. 06-4
AFA 2007 Chicago Meetings Paper

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.

Number of Pages in PDF File: 48

Keywords: portfolio choice, collateral

JEL Classification: G11,E21

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Date posted: March 17, 2006  

Suggested Citation

Willen, Paul and Kubler, Felix, 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: https://ssrn.com/abstract=891406 or http://dx.doi.org/10.2139/ssrn.891406

Contact Information

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 ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900

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