Time Costs of Risky Asset Management: Dynamic Portfolio Choice and Limited Participation

Abstract

We posit the time required for managing risky asset investment including conducting research and monitoring its performance. An economic agent, who should allocate a limited amount of time to labor, leisure and risky investment, is subject to the opportunity time cost, which is forgone labor or leisure. We explore the dynamic optimal portfolio, consumption, labor and leisure choices in the presence of such time costs. Our model is shown to yield the stock holding ratio and limited participation in the stock market consistent with historical behavior of U.S. households. In addition, it outperforms benchmark models including standard consumption-based models in explaining the cross-sectional dispersion of consumption, wealth, income, and labor/leisure time observed in demographic data.