Portfolio Choices Over the Life-Cycle and the Cyclical Skewness of Labor Income Shocks

Abstract

I study the implications of skewness in labor income risk for portfolio choices over the life-cycle. First, I show that French households that face higher left-skewness have lower equity holdings. Then, I calibrate a life-cycle model that incorporates the cyclical skewness observed in US data. The negative effect of skewness on the equity share counteracts the low beta of labor income shocks, in particular for households with modest financial wealth relative to human capital. In the baseline calibration, and holding variance constant, skewness turns upside down the predicted life-cycle profile of the equity share and produces a hump-shaped relationship with age.