Portfolio Choices Over the Life-Cycle and the Cyclical Skewness of Labor Income Shocks
Résumé
I structurally estimate a life-cycle model of portfolio choices that incorporates the relationship between stock market returns and the cross-sectional skewness of idiosyncratic labor income shocks. The cyclicality of this skewness can explain (i) why young households with modest financial wealth do not participate in the stock market and (ii) why, conditional on participation, the share of financial wealth invested in equity slightly increases with age until retirement. With an estimated relative risk aversion of 5 and yearly participation cost of $290, the model matches the evolution of wealth, of stock market participation and of the equity share of participants over the life-cycle. Without cyclical skewness, the same model requires a risk aversion above 10 or a participation cost above $1,000 to match the average equity share and cannot explain its decline over the life-cycle. Nonetheless, cyclical skewness reduces the aggregate demand for equity by at most 15%.