Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/55546
Authors: 
Davis, Steven J.
Kubler, Felix
Willen, Paul
Year of Publication: 
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

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