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http://hdl.handle.net/10419/55546
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| Title: | | Borrowing costs and the demand for equity over the life cycle  |
| Authors: | | Davis, Steven J. Kubler, Felix Willen, Paul |
| Issue Date: | | 2005 |
| Series/Report no.: | | Working paper series // Federal Reserve Bank of Boston 05-7 |
| Abstract: | | We construct a life-cycle model that delivers realistic behavior for both equity holdings and borrowings. The key model ingredient is a wedge between the cost of borrowing and the risk-free investment return. Borrowing can either raise or lower equity demand, depending on the cost of borrowing. A borrowing rate equal to the expected return on equity - which we show roughly matches the data - minimizes the demand for equity. Alternative models with no borrowing or limited borrowing at the risk-free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings. |
| JEL: | | D91 G11 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Working Paper Series, Federal Reserve Bank of Boston
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