Why Do Household Portfolio Shares Rise in Wealth?
Review of Financial Studies, Vol. 23, No. 11, 2010
57 Pages Posted: 16 Mar 2007 Last revised: 13 Dec 2011
There are 2 versions of this paper
Why Do Household Portfolio Shares Rise in Wealth?
Why Do Household Portfolio Shares Rise in Wealth?
Date Written: August 23, 2010
Abstract
We develop a life-cycle consumption and portfolio choice model in which households have nonhomothetic utility over two types of goods, basic and luxury. We calibrate the model to match the cross-sectional and life-cycle variation in the basic expenditure share in the Consumer Expenditure Survey. The model explains the degree to which the portfolio share in risky assets rises in wealth in the cross-section of households in the Survey of Consumer Finances. For a given household, the portfolio share can fall in response to an increase in wealth, even though the model implies decreasing relative risk aversion.
Keywords: Decreasing relative risk aversion, Engel curves, Life-cycle model, Nonhomothetic utility, Portfolio choice
JEL Classification: D11, D12, G11
Suggested Citation: Suggested Citation
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