Faculty of Economics and Business Administration Publications Database

Precautionary Portfolio Behavior from a Life-Cycle Perspective

Bertaut, Carol C.
Volume: 21
Number: 8/9
Pages: 1511 - 1542
Month: June
ISSN-Print: 0165-1889
Link External Source: Online Version
Year: 1997
Keywords: Precautionary saving; Portfolio choice; Stockholding; Income risk; Career uncertainty
Abstract: The literature on household asset accumulation draws a sharp distinction between "short-run" precautionary motives to buffer consumption from annual income shocks, and "long-run" life cycle considerations under income certainty. However, estimates of shock persistence imply considerable career uncertainty. We study long-run precautionary motives for life-cycle wealth accumulation and portfolios allowing for uncertain returns, incomes, and lifespan. We separate the effects of various factors on mean and median asset holdings, including education, risk aversion, household heterogeneity, bequests, impatience, variance and serial correlation of income shocks. Numerical solutions are compared with data from the 1992 Survey of Consumer Finances.