Household wealth, portfolio selection and consumption behavior

In the past twenty years, household wealth undergoes profound changes and in particular a notable increase of the share of financial wealth. The hike of stock market prices in the late 1990s, the burst of the speculative bubble since the summer of 2000 and the continued upsurge of housing prices lead to important swings of the value of household wealth. These large changes raise a number of issues concerning their consequences, both real - in terms of consumption and savings - and financial - in terms of portfolio selection. This article studies the break up of wealth between different assets (portfolio choice theory) and the impact of aggregate wealth on consumption (wealth effect), taking into account population ageing. The age of consumers indeed influences both the level of their savings (life-cycle theory) and their investment horizon (short vs. long-run). We should expect that older households, on average, would lean towards more liquid assets as their remaining life span is narrowing. The share of housing wealth in aggregate wealth should decrease. Population aging should also lead to an increase of the aggregate saving rate for at least the coming twenty years.