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Labor-Market Uncertainty and Portfolio Choice Puzzles

The standard life-cycle model of household portfolio choice has difficulty generating a realistic age profile of risky share. These models not only imply a high risky share on average but also a steeply decreasing age profile, whereas the risky share is mildly increasing in the data. We introduce age-dependent labor-market uncertainty into an otherwise standard model. A great uncertainty in the labor market---due to high unemployment risk, frequent job turnovers, and an unknown career path---prevents young workers from taking too much risk in the financial market. As the labor-market uncertainty is resolved over time, workers start taking more risk in their financial portfolios.


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