Portfolio Choice and Precautionary Savings
Economics Bulletin, Vol. 31, No. 2
9 Pages Posted: 13 Jul 2011
We study the effect on savings of an increase in the capital risk of the investment opportunities when the representative consumer is allowed to optimally choose her portfolio. Sandmo (1970) and Levhari and Srinivasan (1969) prove that individuals with high risk-aversion and time-separable, power utility increase their optimal savings when capital risk increases holding constant the expected return of the risky asset. We obtain the opposite effect when the consumer chooses her portfolio allocation optimally.
Keywords: precautionary saving, capital risk
JEL Classification: D91, E21, G11
Suggested Citation: Suggested Citation