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http://hdl.handle.net/2451/26424
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| Title: | Labor Income Dynamics at Business-cycle Frequencies:Implications for
Portfolio Choice |
| Authors: | Lynch, Anthony W.
Tan, Sinan |
| Issue Date: | 29-Nov-2004 |
| Series/Report no.: | FIN-05-022 |
| Abstract: | A large recent literature has focused on multiperiod portfolio choice
with labor income, and while the models are elaborate along several
dimensions, they all assume that the joint distribution of shocks to
labor income and asset returns is i.i.d.. Calibrating this joint
distribution to U.S. data, these papers obtain three results not found
empirically for U.S. households: young agents choose a higher stock
allocation than old agents; young agents choose a higher stock
allocation when poor than when rich; and, young agents always hold some
stock. This paper asks whether allowing the conditional joint
distribution to depend on the business cycle can allow the model to
generate equity holdings that better match those of U.S. households,
while keeping the unconditional distribution the same as in the data.
Calibrating the business-cycle variation in the first two moments of
labor income growth to U.S. data leads to large reductions in stock
holdings by young agents with low wealth-income ratios. The reductions
are so large that young, poor agents now hold less stock than both
young, rich agents and old agents, and also hold no stock a large
fraction of the time. Our results suggest that the predictability of
labor-income growth at a business-cycle frequency plays an important
role in a young agent’s decision-making about her
portfolio’s stock holding. |
| URI: | http://hdl.handle.net/2451/26424 |
| Appears in Collections: | Finance Working Papers
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