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Collateralized Borrowing And Life-Cycle Portfolio Choice

Author

Listed:
  • Paul Willen

    (Federal Reserve Bank of Boston)

  • Felix Kubler

Abstract

We examine the effects of collateralized borrowing in a realistically parameterized life-cycle portfolio choice problem. We provide basic intuition in a two-period model and then solve a multi-period model computationally. Our analysis provides insights into life-cycle portfolio choice relevant for researchers in macroeconomics and finance. In particular, we show that standard models with unlimited borrowing at the riskless rate dramatically overstate the gains to holding equity when compared with collateral constrained models. Our results do not depend on the specification of the collateralized borrowing regime; the gains to trading equity remain relatively small even with the unrealistic assumption of unlimited leverage. We argue that our results strengthen the role of borrowing constraints in explaining the portfolio participation puzzle

Suggested Citation

  • Paul Willen & Felix Kubler, 2006. "Collateralized Borrowing And Life-Cycle Portfolio Choice," 2006 Meeting Papers 578, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:578
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    Cited by:

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    3. Wei Cui & Insook Cho, 2019. "Household’s Happiness and Financial Market Participation," Global Economic Review, Taylor & Francis Journals, vol. 48(4), pages 396-418, October.
    4. Roche, Hervé & Tompaidis, Stathis & Yang, Chunyu, 2013. "Why does junior put all his eggs in one basket? A potential rational explanation for holding concentrated portfolios," Journal of Financial Economics, Elsevier, vol. 109(3), pages 775-796.
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    6. Stan Miles, 2013. "Constant-collateral pyramiding trading strategies in futures markets," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(4), pages 381-396, December.
    7. Ian Ayres & Barry J. Nalebuff, 2008. "Life-cycle Investing and Leverage: Buying Stock on Margin Can Reduce Retirement Risk," NBER Working Papers 14094, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Portfolio Choice; Collateral;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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