Young agents with low wealth-income ratios counter factually hold more stock than young, rich agents and old agents using the standard portfolio choice model with i.i.d. stock returns and labor income. This paper matches the countercyclical volatility and procyclical mean of U.S. labor income and finds that, consistent with U.S. data, young, poor agents now hold less stock than both young, rich agents and old agents, and no stock a large fraction of the time. Our results suggest that the predictability of labor income growth at a business-cycle frequency, particularly the countercyclical variation in volatility, plays an important role in a young agent's decision making about her portfolio's stock holding.

ABSTRACT Constantinides (1986) documents how the impact of transaction costs on per‐annum liquidity premia in the standard dynamic allocation problem with i.i.d. returns is an order of magnitude smaller than the cost rate itself. Recent papers form portfolios sorted on liquidity measures and find spreads in expected per‐annum return that are the same order of magnitude as the transaction cost spread. When we allow returns to be predictable and introduce wealth shocks calibrated to labor income, transaction costs are able to produce per‐annum liquidity premia that are the same order of magnitude as the transaction cost spread.