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Abstract
We estimate the life-cycle profile of stock market participation and risky portfolio share. We avoid standard identification restrictions by estimating in first differences. This approach is also more robust to potential mis-specification associated with estimation in levels. We find that stock market participation is a hump-shaped function of age, while the conditional risky share is initially flat and then decreasing. We investigate different economic mechanisms and find empirical support for participation costs, decreasing relative risk aversion, human capital as a close substitute for bonds, and background risks. We conclude with a structural life-cycle model that replicates these patterns.
