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moneyport - Household Portfolio Allocations, Life Cycle...

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Household Portfolio Allocations, Life Cycle E®ects and Anticipated In°ation ¤ Matthew Chambers Department of Economics Towson University Towson, Maryland 21252 Don E. Schlagenhauf Department of Economics Florida State University Tallahassee, Florida 32306 February 2003 Abstract Stocks, bonds and money play di®erent roles in an individual's portfolio. We ex- amine data from various Wealth Supplements of the PSID and document portfolio patterns over the life cycle. In order to account for observed holding patterns, we con- struct a stochastic overlapping generation model. In the model, individuals are ex ante identical, but are subject an uncertain life expectancy and income uncertainty. Indi- viduals attempt to smooth consumption by holding on money, bonds and real capital. We show that the model is able to replicate life cycle portfolio allocations. Because money holding patterns are age dependent, we use the model to examine the portfolio e®ects of in°ation. We ¯nd that in°ation has modest e®ects on household portfolio compositions. The largest e®ects occur for households between age 45 and age 65. ¤ We have bene¯ted from the comments of Carlos Garriga, S. Chaterjee, Ayse µ Imrohoro¸ glu, Ed Prescott, and especially Eric Young. An earlier version of this paper was presented at the 2001 Meeting of the Society for Economic Dynamics.
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1. Introduction In recent years, there has been a great amount of interest in trying to understand household portfolio behavior over the life cycle. The motivation for this interest, in part, comes from the aging of the baby boom generation and the implications of aging for social security systems and the level of private and national savings. A substantial theoretical literature has considered age-related patterns of asset allocation in terms of the standard portfolio choice paradigm. 1 Recently, the question of the relationship between age and portfolio allocation has been investigated empirically. Canner, Mankiw, and Weil (1997) examine whether investors who are more risk averse, such as older individuals, hold more riskless assets in their portfolios. Such behavior does not appear to be consistent with the mutual fund separation theorem. Poterba and Samwick (2000) examine saving behavior from a demographic perspective and ¯nd that the composition of an individual's portfolio varies over the life cycle. In this paper we examine the Wealth Supplements to the PSID and document how cur- rency, bond and stock holding varies with wealth levels as well as an agent's life cycle. Stockholding is characterized by a humped shaped pattern over the life cycle with the peak occurring in the mid ¯fties. In contrast, money plays a very important role for young and old individuals. Our data suggest that the fraction of the portfolio allocated to money has a "U-shaped" life cycle pattern. The life cycle pattern of bond holding in the portfolio seems to increase with age until retirement. Because we ¯nd that portfolio composition depends
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moneyport - Household Portfolio Allocations, Life Cycle...

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