TY  - JOUR
AU  - Willen,Paul
AU  - Kubler,Felix
TI  - Collateralized Borrowing and Life-Cycle Portfolio Choice
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12309
PY  - 2006
Y2  - June 2006
UR  - http://www.nber.org/papers/w12309
L1  - http://www.nber.org/papers/w12309.pdf
N1  - Author contact info:
Paul S. Willen
Federal Reserve Bank of Boston
600 Atlantic Avenue
Boston, MA  02210-2204
Tel: 617/973-3149
Fax: 617/973-2123
E-Mail: willen968@gmail.com

Felix Kubler
University of Zurich
Plattenstrasse 32
CH-8032 Zurich
Switzerland
E-Mail: fkubler@gmail.com
M2  - featured in NBER digest on 2006-06-19
AB  - 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, that is, why most investors do not own stock.
ER  -