Working Paper: CEPR ID: DP9691
Authors: Andreas Fagereng; Charles Gottlieb; Luigi Guiso
Abstract: We study the life cycle of portfolio allocation following for 15 years a large random sample of Norwegian households using error-free data on all components of households? investments drawn from the Tax Registry. Both, participation in the stock market and the portfolio share in stocks, have important life cycle patterns. Participation is limited at all ages but follows a hump-shaped profile which peaks around retirement; the share invested in stocks among the participants is high and flat for the young but investors start reducing it as retirement comes into sight. Our data suggest a double adjustment as people age: a rebalancing of the portfolio away from stocks as they approach retirement, and stock market exit after retirement. Existing calibrated life cycle models can account for the first behavior but not the second. We show that incorporating in these models a reasonable per period participation cost can generate limited participation among the young but not enough exit from the stock market among the elderly. Adding also a small probability of a large loss when investing in stocks, produces a joint pattern of participation and of the risky asset share that is similar to the one observed in the data. A structural estimation of the relevant parameters of the model reveals that the parameter combination that fits the data best is one with a relatively large risk aversion, small participation cost and a yearly large loss probability of around 1.3 percent.
Keywords: asset allocation; asset market participation; life cycle; portfolio choice; portfolio rebalancing
JEL Codes: D14; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| age (J14) | asset allocation (G11) |
| age (J14) | participation in the stock market (G10) |
| participation in the stock market (G10) | exit from the stock market (G10) |
| participation cost and probability of large loss (G22) | participation in the stock market (G10) |
| risk aversion (D81) | asset allocation (G11) |