Labor Market Uncertainty and Portfolio Choice Puzzles

The standard life-cycle models of household portfolio choice have difficulty generating a realistic age profile of risky share. These models not only imply a high risky share on average but also a steeply decreasing age profile, whereas the risky share is mildly increasing in the data. We introduce age-dependent, labor market uncertainty into an otherwise standard model. A great uncertainty in the labor market high unemployment risk, frequent job turnovers, and an unknown career path-prevents young workers from taking too much risk in the financial market. As labor market uncertainty is resolved over time, workers start taking more risk in their financial portfolios.