Borrowing costs and the demand for equity over the life cycle

  • Davis S
  • Kubler F
  • Willen P
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Abstract

We construct a life cycle model that delivers realistic behavior for both equity holdings and borrowing. 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. ABSTRACT FROM AUTHOR Copyright of Review of Economics & Statistics is the property of MIT Press and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should

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Authors

  • Steven J. Davis

  • Felix Kubler

  • Paul Willen

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