Fitting Parsimonious Household-Portfolio Models to Data

Abstract

US data and new stockholding data from fifteen European countries and China exhibit a common pattern: stockholding shares increase in household income and wealth. Yet, there is a multitude of numbers to match through models. Using a single utility function across households (parsimony), we suggest a strategy for fitting stockholding numbers, while replicating that saving rates increase in wealth, too. The key is introducing subsistence consumption to an Epstein-Zin-Weil utility function, creating endogenous risk-aversion differences across rich and poor. A closed-form solution for the model with insurable labor-income risk serves as calibration guide for numerical simulations with uninsurable labor-income risk.

Keywords: Epstein-Zin-Weil recursive preferences, subsistence consumption, household-portfolio shares, business equity, wealth inequality

JEL Classification: G11, D91, D81, D14, D11, E21