Asset market participation and portfolio choice over the life-cycle
Journal article, Peer reviewed
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Original versionThe journal of finance, 2017, Vol. 72, No. 2, pp. 705–750 https://doi.org/10.1111/jofi.12484
Using error‐free data on life‐cycle portfolio allocations of a large sample of Norwegian households, we document a double adjustment as households age: a rebalancing of the portfolio composition away from stocks as they approach retirement and stock market exit after retirement. When structurally estimating an extended life‐cycle model, the parameter combination that best fits the data is one with a relatively large risk aversion, a small per‐period participation cost, and a yearly probability of a large stock market loss in line with the frequency of stock market crashes in Norway. This paper reexamines empirically the life‐cycle behavior of investors' portfolios, establishing novel features of the joint profiles of investors' participation in the stock market and the portfolio share invested in stocks. We estimate the parameters of a standard life‐cycle portfolio model with uninsurable labor income, extended to incorporate costly participation and a small probability of a stock market crash, and show that it can capture these features.