| In this dissertation I focus on the microeconomic manifestation of the equity premium puzzle; given the equity premium which has prevailed, why do households hold such a small proportion of their wealth in stocks? This is the stockholding puzzle. Theory from the precautionary saving literature predicts that agents with a higher level of labor income uncertainty would moderate their exposure to risk by holding a greater proportion of their wealth in safe assets. Kimball (1991) calls this behavior temperance. The goal of this dissertation is to determine whether the level of uncertainty that the typical household faces induces temperance sufficient to cause observed assetholding behavior. Two of the essays use simulation methods to suggest new approaches to this problem. The third essay is an empirical examination of the conclusion from the second. The first essay deals exclusively with labor income uncertainty. In it I use a realistic form of labor income uncertainty, which includes permanent as well as transitory shocks to labor income. Unfortunately, once an income process of this type has been modeled, the simulations still predict counterfactually that agents will hold the majority of their assets in risky form. The second essay includes housing as an asset. Agents can still hold a risky and a riskless financial asset, but now each agent also purchases a house and makes fixed mortgage payments during his life. Results from this paper suggest that the risk associated with the commitment to a fixed payment coupled with labor income uncertainty leads to predictions of low risky asset holding. The third essay empirically tests this theory that committed expenditure risk induces temperance sufficient to reduce risky asset holding. I show that agents that have a higher mortgage payment to income ratio also have lower risky asset shares, as predicted by the second essay. Thus this dissertation shows that when household level uncertainty is realistically modeled, particularly the uncertainty dealing with labor income and homeownership, the stockholding puzzle can be resolved. |