Portfolio Choice and Precautionary Savings

Economics Bulletin, Vol. 31, No. 2

9 Pages Posted: 13 Jul 2011

Abstract

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

Calcagno, Riccardo and Rossi, Maria Christina, Portfolio Choice and Precautionary Savings. Economics Bulletin, Vol. 31, No. 2, Available at SSRN: https://ssrn.com/abstract=1884821

Riccardo Calcagno (Contact Author)

Politecnico di Torino ( email )

Corso Duca degli Abruzzi, 24
Torino, Torino 10129
Italy

Maria Christina Rossi

University of Torino ( email )

Torino
Italy

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