TY  - JOUR
AU  - Davis,Steven J.
AU  - Kubler,Felix
AU  - Willen,Paul
TI  - Borrowing Costs and the Demand for Equity Over the Life Cycle
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9331
PY  - 2002
Y2  - November 2002
UR  - http://www.nber.org/papers/w9331
L1  - http://www.nber.org/papers/w9331.pdf
N1  - Author contact info:
Steven J. Davis
Booth School of Business
The University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-7312
Fax: 773/834-0733
E-Mail: Steven.Davis@ChicagoBooth.edu

Felix Kubler
University of Zurich
Plattenstrasse 32
CH-8032 Zurich
Switzerland
E-Mail: fkubler@gmail.com

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
AB  - We analyze consumption and portfolio behavior in a life-cycle model with realistic borrowing costs and income processes. We show that even a small wedge between borrowing costs and the risk-free return dramatically shrinks the demand for equity. When the cost of borrowing equals or exceeds the expected return on equity   the relevant case according to the data   households hold little or no equity during much of the life cycle. The model also implies that the correlation between consumption growth and equity returns is low at all ages, and that risk aversion estimates based on the standard excess return formulation of the consumption Euler Equation are greatly upward biased. The demand for equity in the model is non-monotonic in borrowing costs and risk aversion, and the standard deviation of marginal utility growth is an order of magnitude smaller than the Sharpe ratio.
ER  -