Optimal Portfolio Choice For Long Horizon Investors With Nontradable Labor Income
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Optimal Portfolio Choice For Long Horizon Investors With Nontradable Labor Income
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Author : Luis M. Viceira
language : en
Publisher:
Release Date : 1999
Optimal Portfolio Choice For Long Horizon Investors With Nontradable Labor Income written by Luis M. Viceira and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1999 with Portfolio management categories.
This paper analyzes optimal portfolio decisions of long-horizon investors with undiversifiable labor income risk and exogenous expected retirement and lifetime horizons. It shows that the fraction of savings optimally invested in stocks is unambiguously larger for employed investors than for retired investors when labor income risk is uncorrelated with stock return risk. This result provides support for the popular recommendation by investment advisors that employed investors should invest in stocks a larger proportion of their savings than retired investors. This paper also examines the effect of increasing labor income risk on savings and portfolio choice and finds that, when labor income risk is independent of stock market risk, a mean-preserving increases in the variance of labor income growth increases the investor's willingness to save and reduce her willingness to hold the risky asset in her portfolio. A sensible calibration of the model shows that savings are relatively more responsive to changes in labor income risk than portfolio demands. Positive correlation between labor income innovations and unexpected asset returns also reduces the investor's willingness to hold the risky asset, because of its poor properties as a hedge against unexpected declines in labor income. This paper also provides intuition on the peculiar form of optimal portfolio choice of very young investors predicted by the standard life-cycle model
Optimal Portfolio Choice For Long Horizon Investors With Nontradable Labor Income
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Author : Luis Manuel Viceira Alguacil
language : en
Publisher:
Release Date : 1999
Optimal Portfolio Choice For Long Horizon Investors With Nontradable Labor Income written by Luis Manuel Viceira Alguacil and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1999 with categories.
Essays On Optimal Portfolio Decisions For Long Term Investors
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Author : Hui-Ju Tsai
language : en
Publisher:
Release Date : 2010
Essays On Optimal Portfolio Decisions For Long Term Investors written by Hui-Ju Tsai and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2010 with Asset allocation categories.
This dissertation contains two essays on the optimal portfolio decision for long-term investors. The first essay studies the optimal asset allocation for long-horizon investors with non-tradable labor income when multiple risky asset returns are predictable. It finds that more risk-averse investors hold a higher bond/stock ratio in their risky portfolios when labor income is positively correlated with stock return or independent of risky asset returns, but the reverse is true when labor income is positively correlated with bond return. The allocation to stock inherits the inverted U-shaped pattern of labor income growth with respect to expected time until retirement. These results suggest that popular recommendations of investment advisors that more conservative investors should hold a higher bond/stock ratio and that the portfolio allocation to stock should equal 100 minus age may both lack theoretical justification. In the out-of-sample performance test, the dynamic portfolio shows the highest mean returns and Sharpe ratio than two benchmark portfolios, justifying the economic significance of incorporating the time-variation of investment opportunities and nontradable labor income into investors' portfolio choice. The second essay studies employees' optimal portfolio in their defined contribution pension plans. Assuming a discrete time model with predictable risky asset returns, the essay finds that the employees' optimal portfolio decision can be greatly affected by the employees' time to retirement, risk preference, contribution rate as well as the correlation between labor income and asset returns. Performance test shows that the gains from adopting the dynamic portfolio strategy relative to several benchmark strategies, including the 1/n rule, the optimal static strategy with and without the consideration of asset return predictability, all stock strategy, and all company stock strategy, are economically significant and the economic gain increases with employees' risk aversion. The empirical evidence that employees invest significantly in their company stock in pension plans is difficult to be justified, even after the consideration of short-sale constraints, higher expected company stock return, employees' familiarity with their company, and employers' exclusive match policy. Over allocation to company stock can be very costly, especially to conservative employees.
Strategic Asset Allocation
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Author : John Y. Campbell
language : en
Publisher: OUP Oxford
Release Date : 2002-01-03
Strategic Asset Allocation written by John Y. Campbell and has been published by OUP Oxford this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002-01-03 with Business & Economics categories.
Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
Investment Horizon Labor Income And Portfolio Choice Of Private Investors
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Author : Yulia V. Veld-Merkoulova
language : en
Publisher:
Release Date : 2009
Investment Horizon Labor Income And Portfolio Choice Of Private Investors written by Yulia V. Veld-Merkoulova and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with categories.
I empirically investigate the impact of age and self-reported planning horizon on asset allocation decisions for a broad cross-section of individual investors. I find that age and investment horizon play different roles in determining investors' risky portfolios. When risky investments include real estate, the share of risky assets declines with age. Planning horizon tends to influence only investments in financial risky assets, such as stocks, options, and mutual funds. A longer planning horizon leads to an increasing share of risky financial investments, independent of investors' age.
Optimal Consumption And Portfolio Choice For Long Horizon Investors
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Author : Luis Manuel Viceira Alguacil
language : en
Publisher:
Release Date : 1998
Optimal Consumption And Portfolio Choice For Long Horizon Investors written by Luis Manuel Viceira Alguacil and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1998 with Investments categories.
Strategic Asset Allocation
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Author : John Y. Campbell
language : en
Publisher: Clarendon Lectures in Economic
Release Date : 2002
Strategic Asset Allocation written by John Y. Campbell and has been published by Clarendon Lectures in Economic this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with Asset allocation categories.
This volume provides a scientific foundation for the advice offered by financial planners to long-term investors. Based upon statistics on asset return behavior and assumed investor objectives, the authors derive optimal portfolio rules that investors can compare with existing rules of thumb.
Portfolio Choice Problems
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Author : Nicolas Chapados
language : en
Publisher: Springer Science & Business Media
Release Date : 2011-07-12
Portfolio Choice Problems written by Nicolas Chapados and has been published by Springer Science & Business Media this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011-07-12 with Computers categories.
This brief offers a broad, yet concise, coverage of portfolio choice, containing both application-oriented and academic results, along with abundant pointers to the literature for further study. It cuts through many strands of the subject, presenting not only the classical results from financial economics but also approaches originating from information theory, machine learning and operations research. This compact treatment of the topic will be valuable to students entering the field, as well as practitioners looking for a broad coverage of the topic.
Heterogeneity And Persistence In Returns To Wealth
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Author : Andreas Fagereng
language : en
Publisher: International Monetary Fund
Release Date : 2018-07-27
Heterogeneity And Persistence In Returns To Wealth written by Andreas Fagereng and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018-07-27 with Business & Economics categories.
We provide a systematic analysis of the properties of individual returns to wealth using twelve years of population data from Norway’s administrative tax records. We document a number of novel results. First, during our sample period individuals earn markedly different average returns on their financial assets (a standard deviation of 14%) and on their net worth (a standard deviation of 8%). Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth: moving from the 10th to the 90th percentile of the financial wealth distribution increases the return by 3 percentage points - and by 17 percentage points when the same exercise is performed for the return to net worth. Fourth, wealth returns exhibit substantial persistence over time. We argue that while this persistence partly reflects stable differences in risk exposure and assets scale, it also reflects persistent heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.
Optimal Value And Growth Tilts In Long Horizon Portfolios
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Author : Jakub W. Jurek
language : en
Publisher:
Release Date : 2008
Optimal Value And Growth Tilts In Long Horizon Portfolios written by Jakub W. Jurek and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
We develop an analytical solution to the dynamic portfolio choice problem of an investor with power utility defined over wealth at a finite horizon, who faces a time-varying investment opportunity set, parameterized using a flexible vector autoregression. We apply this framework to study the horizon effects in the allocations of equity-only investors, who hold a mix of value and growth indices, and a more general investor, who also has access to Treasury bills and bonds. We find that the mean-allocation of equity-only investors is heavily tilted towards value stocks at short horizons, but the magnitude of this tilt declines dramatically with the investment horizon, implying that growth is less risky than value at long horizons. Investors with access to bills and bonds exhibit similar behavior, when value and growth tilts are computed relative to the total equity allocation of the portfolio. However, after accounting for the propensity of these investors to increase their total equity allocation as the horizon increases, the mean value tilt of the optimal allocation is shown to be positive and stable across time.