The standard life-cycle models of household portfolio choice have difficulty generating a realistic age profile of risky share. These models not only imply a high risky share on average but also a steeply decreasing age profile, whereas the risky share is mildly increasing in the data. We introduce age-dependent, labor market uncertainty into an otherwise standard model. A great uncertainty in the labor market—high unemployment risk, frequent job turnovers, and an unknown career path—prevents young workers from taking too much risk in the financial market. As labor market uncertainty is resolved over time, workers start taking more risk in their financial portfolios.
"Labor Market Uncertainty and Portfolio Choice Puzzles."
American Economic Journal: Macroeconomics,
Household Saving; Personal Finance
Intertemporal Household Choice; Life Cycle Models and Saving
Criteria for Decision-Making under Risk and Uncertainty
Portfolio Choice; Investment Decisions
Wage Level and Structure; Wage Differentials
Labor Turnover; Vacancies; Layoffs