Working Paper: CEPR ID: DP10369
Authors: Claudio Campanale; Carolina Fugazza; Francisco J. Gomes
Abstract: Traditionally, quantitative models that have studied households' portfolio choices have focused exclusively on the different risk properties of alternative financial assets. We introduce differences in liquidity across assets in the standard life-cycle model of portfolio choice. More precisely, in our model, stocks are subject to transaction costs, as considered in recent macro literature. We show that, when these costs are calibrated to match the observed infrequency of households' trading, the model is able to generate patterns of portfolio stock allocation over age and wealth that are constant or moderately increasing, thus more in line with the existing empirical evidence.
Keywords: Cash-in-advance; Household portfolio choice; Self-insurance; Transaction cost
JEL Codes: D91; G11; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity differences (E41) | portfolio choices (G11) |
| transaction costs (D23) | portfolio allocation behavior (G11) |
| transaction costs (D23) | preference for liquid assets (E41) |
| preference for liquid assets (E41) | consumption smoothing decisions (D15) |
| current stock share and wealth (G19) | optimal stock share decision (G11) |
| wealth levels (D31) | stock share decision (G11) |