Portfolio Choice and Liquidity Constraints
By Alexander Michaelides, Michael Haliassos. Social Science Research Network, 2000
268 citations recorded by the source corpus.
We study the infinite horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle for impatient consumers with access to riskless and risky assets. We consider a labour income process that allows us to decompose the consumption and portfolio effects of permanent and transitory shocks to labour income and show their interaction with liquidity constraints and their relative importance in producing precautionary effects and the portfolio specialization result. We show why the puzzle has proved robust for a number of model variations attempted in the literature, and argue that positive correlation between earnings shocks and stock returns is unlikely to provide a plausible resolution. We then offer an alternative explanation for observed stock holding patterns and the slow emergence of an equity culture. Specifically, we find that relatively small, fixed, stock market entry costs are sufficient to deter households from participating in the stock market. Such entry costs could arise, for example, from informational considerations, sign-up fees and investor inertia.
Subfields: Accounting, Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/56f7a8f9260c057fff9c3c1cf8c6a823ed20e8b4
Citations in the corpus
- Optimal life cycle asset allocation : understanding the empirical evidence (2003, unknown): “Second, 1See, for instance, Hubbard, Skinner and Zeldes (1995), Carroll (1997), Attanasio, Banks, Meghir and Weber (1999), Gourinchas and Parker (2002), Dynan, Skinner and Zeldes (2002) and Cagetti (2003).”
- Portfolio choice with internal habit formation : a life-cycle model with uninsurable labor income risk (2003, unknown): “Viceira (2001) and Haliassos and Michaelides (2003) show that varying the correlation between the transitory earnings shock and the stock return does not affect the portfolio choice allocation; similar results hold here and are therefore omitted.”
- Borrowing Costs and the Demand for Equity over the Life Cycle (2006, unknown): “8 Haliassos and Michaelides (2003) make an identical point in the context of an infinitehorizon model with no borrowing.”
- Asset Market Participation and Portfolio Choice over the Life-Cycle (2012, unknown): “…and Goldstein (2007), Campbell and Viceira (2001), Cocco, Gomes, and Maenhout (2005), Davis, Kubler, and Willen (2006), Gakidis (1998), Gomes and Michaelides (2003, 2005), Gomes, Kotlikoff, and Viceira (2008), Haliassos and Michaelides (2002), Heaton and Lucas (1997), Polkovnichenko (2007),…”
- Occupation-Level Income Shocks and Asset Returns: Their Covariance and Implications for Portfolio Choice (2013, unknown): “2Rf V i + A var(R̃) 2Rf (β c − β y)(2) = Y i∗ + A var(R̃) 2Rf (β c − β y)(2), (15) where Y i∗ is the certain equivalent consumption associated with the endowment point.”