GHH Preferences on Households' Portfolio Choices: Theoretical Implications and Empirical Evidence

Abstract

This paper explores theoretical implications and empirical evidence of GHH preferences [Greenwood et al. (1988)] over portfolio choices. First, we analytically solve a parsimonious life-cycle portfolio choice model with the GHH preferences and endogenous labor-leisure choice. Second, our analytical solution identifies four effects due to the GHH preferences (through endogenous labor-leisure choices) on risky shares; and it shows that two net effects hinge on the value of one key structural parameter. Third, we empirically test main theoretical predictions with the Panel Study of Income Dynamics data. Overall, the estimation results provide empirical evidence in support of certain key implications out of GHH preferences. Thus, our analysis sheds light on one of the most fundamental, yet highly contentious, questions in quantitative macroeconomic analysis: the choice of utility functions in a representative agent model when portfolio choices are of concern.