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A human capital explanation for an asset allocation puzzle?

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  • Gomes, Francisco
  • Michaelides, Alexander

Abstract

We show that a life-cycle asset allocation model with liquidity constraints and realistically calibrated uninsurable labor income risk rationalizes the asset allocation puzzle of Canner, Mankiw and Weil (1997). Based on empirical estimates of the correlation between stock returns and individual earnings, labor income is a closer substitute to long-term bonds than to stocks. As a result, more risk averse investors hold a smaller proportion of their risky portfolio in equities. Moreover, this explanation is consistent with the recommendation that younger households should be more heavily invested in stocks than older households.

Suggested Citation

  • Gomes, Francisco & Michaelides, Alexander, 2004. "A human capital explanation for an asset allocation puzzle?," LSE Research Online Documents on Economics 24705, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24705
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    File URL: http://eprints.lse.ac.uk/24705/
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    References listed on IDEAS

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    More about this item

    Keywords

    life-cycle models; portfolio choice; liquidity constraints; uninsurable labor income risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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