Stock Market Participation, Portfolio Choice and Pensions over the Life-Cycle

The empirical evidence on stock market participation and portfolio choice de\u85es the predictions of standard life-cycle theory. In this paper we develop and estimate a model of portfolio choice that can account for the limited stock market participation and substantial portfolio diversi\u85cation seen in the data. We present three realistic extensions to the basic framework: per period \u85xed costs, public pension provision, and a small chance of a stock market crash. The estimated model is able to explain observed patterns at reasonable wealth levels, while keeping to a fairly simple frame-work. We demonstrate that it is no longer necessary to assume counterfactual asset holdings, heterogeneity in preferences, or implausible parameter values, in order to match key \u85nancial statistics