Borrowing costs and the demand for equity over the life cycle

Preprint
Publisher Website
Google Scholar
  • 1 January 2005
    • preprint
      • Published in RePEc
Abstract
We construct a life-cycle model that delivers realistic behavior for both equity holdings and borrowings. 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.
All Related Versions

This publication has 0 references indexed in Scilit: