Seminar in Macroeconomics - Margaret Davenport (HEC Lausanne)
Richer Wage Dynamics and Portfolio Choice over the Life-cycle
Tuesday 27 November 2018 (12h15 - 13h30) - Extranef - 109
We explore the implications on household portfolio choice of empirical features of household labor income over the life-cycle. The shocks to household labor income are shown to be asymmetrically distributed, fat-tailed and age-dependent. We show analytically in a two-period model that these features (negative skewness and high kurtosis) reduce the risky share and that this operates mainly by increasing the precautionary motive of agents. While life-cycle models of portfolio choice struggle to generate risky shares and rate of stock market participation that are consistent with empirical evidence, we argue that incorporating the aforementioned features of the household labor income reconciles model based life-cycle portfolio choice with empirical evidence.