Borrowing Costs and the Demand for Equity over the Life Cycle

• Autores: Steven J. Davis, Felix Kubler, Paul Willen
• Localización: The Review of economics and statistics, ISSN 0034-6535, Vol. 88, Nº 2, 2006, págs. 348-362
• Idioma: inglés
• DOI: 10.1162/rest.88.2.348
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• Resumen

  • 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.