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

In this paper we present a calibrated life-cycle model is able to simultaneously match asset allocations and stock market participation profiles over the life-cycle. The inclusion of per period fixed costs and a public pension scheme eradicates the need to assume heterogeneity in preferences, or implausible parameter values, in order to explain observed patterns. We find a per period fixed cost of less than two percent of the permanent component of annual labour income can explain the limited stock marker participation. More generous public pensions are seen to crowd out private savings and significantly reduce the estimates of these fixed costs. This is the first time that concurrent matching of participation and shares has been achieved within the standard preference framework