Portfolio Choice Over The Life Cycle When The Stock And Labor Markets Are Cointegrated
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Portfolio Choice Over The Life Cycle When The Stock And Labor Markets Are Cointegrated
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Author : Luca Benzoni
language : en
Publisher:
Release Date : 2011
Portfolio Choice Over The Life Cycle When The Stock And Labor Markets Are Cointegrated written by Luca Benzoni and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.
We study portfolio choice when labor income and dividends are cointegrated. Economically plausible calibrations suggest young investors should take substantial short positions in the stock market. Because of cointegration the young agent's human capital electively becomes stock-like. However, for older agents with shorter times - to - retirement, cointegration does not have sufficient time to act, and thus their human capital becomes more bond-like. Together, these exects create hump - shaped life - cycle portfolio holdings, consistent with empirical observation. These results hold even when asset return predictability is accounted for.
Portfolio Choice Over The Life Cycle In The Presence Of Trickle Down Labor Income
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Author : Luca Benzoni
language : en
Publisher:
Release Date : 2005
Portfolio Choice Over The Life Cycle In The Presence Of Trickle Down Labor Income written by Luca Benzoni and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with Investments categories.
Empirical evidence shows that changes in aggregate labor income and stock market returns exhibit only weak correlation at short horizons. As we document below, however, this correlation increases substantially at longer horizons, which provides at least suggestive evidence that stock returns and labor income are cointegrated. In this paper, we investigate the implications of such a cointegrated relation for life-cycle optimal portfolio and consumption decisions of an agent whose non-tradable labor income faces permanent and temporary idiosyncratic shocks. We find that, under economically plausible calibrations, the optimal portfolio choice for the young investor is to take a substantial ¿Xem short} position in the risky portfolio, in spite of the large risk premium associated with it. Intuitively, this occurs because the cointegration effect makes the present value of future labor income flows stock-like' for the young agent. However, for older agents who have shorter times-to-retirement, the cointegration effect does not have sufficient time to act, and the remaining human capital becomes more bond-like.' Together, these effects create a hump-shaped optimal portfolio decision for the agent over the life cycle, consistent with empirical observation
Portfolio Choice Over The Life Cycle In The Presence Of Cointegration Between Labor Income And Inflation
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Author : Yang Zhou
language : en
Publisher:
Release Date : 2015
Portfolio Choice Over The Life Cycle In The Presence Of Cointegration Between Labor Income And Inflation written by Yang Zhou and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
We study portfolio choice for a finite-horizon investor whose labor income is cointegrated with inflation. We show that this long-run relationship has substantial impact on the riskiness of human capital and consequently on the optimal portfolio strategy. Because cointegration raises the long-run correlation between human capital and inflation, young investors' human capital effectively hedges inflation risk and crowds out the allocation to inflation-indexed bonds. However, the hedging power of human capital diminishes for older investors because of a weaker cointegration effect and less importance of human capital in total wealth. These effects together show that inflation-indexed bonds matter more for older investors than for young investors.
Asset Market Participation And Portfolio Choice Over The Life Cycle
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Author : Andreas Fagereng
language : en
Publisher:
Release Date : 2013
Asset Market Participation And Portfolio Choice Over The Life Cycle written by Andreas Fagereng and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with Portfolio management categories.
We study the life cycle of portfolio allocation following for 15 years a large random sample of Norwegian households using error-free data on all components of households' investments drawn from the Tax Registry. Both, participation in the stock market and the portfolio share in stocks, have important life cycle patterns. Participation is limited at all ages but follows a hump-shaped profile which peaks around retirement; the share invested in stocks among the participants is high and flat for the young but investors start reducing it as retirement comes into sight. Our data suggest a double adjustment as people age: a rebalancing of the portfolio away from stocks as they approach retirement, and stock market exit after retirement. Existing calibrated life cycle models can account for the first behavior but not the second. We show that incorporating in these models a reasonable per period participation cost can generate limited participation among the young but not enough exit from the stock market among the elderly. Adding also a small probability of a large loss when investing in stocks, produces a joint pattern of participation and of the risky asset share that is similar to the one observed in the data. A structural estimation of the relevant parameters of the model reveals that the parameter combination that fits the data best is one with a relatively large risk aversion, small participation cost and a yearly large loss probability of around 1.3 percent.
Stock Market Mean Reversion And Portfolio Choice Over The Life Cycle
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Author : Alexander Michaelides
language : en
Publisher:
Release Date : 2015
Stock Market Mean Reversion And Portfolio Choice Over The Life Cycle written by Alexander Michaelides and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
We solve for optimal consumption and portfolio choice in a life-cycle model with short-sales and borrowing constraints, undiversifiable labor income risk and a predictable, time-varying, equity premium and show that the investor pursues aggressive market timing strategies. Importantly, in the presence of stock market predictability, the model suggests that the conventional financial advice of reducing stock market exposure as retirement approaches is correct on average, but ignoring changing market information can lead to substantial welfare losses. Therefore, enhanced target-date funds (ETDFs) that condition on expected equity premia increase welfare relative to target-date funds (TDFs). Out-of-sample analysis supports these conclusions.
Portfolio Choice With Internal Habit Formation
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Author : Francisco J. Gomes
language : en
Publisher:
Release Date : 2003
Portfolio Choice With Internal Habit Formation written by Francisco J. Gomes and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003 with Asset allocation categories.
Portfolio Choice With Internal Habit Formation
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Author : Francisco Gomes
language : en
Publisher:
Release Date : 2008
Portfolio Choice With Internal Habit Formation written by Francisco Gomes 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.
Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In contrast to the initial motivation, we find that the model is not able to simultaneously match two very important stylized facts: A low stock market participation rate, and moderate equity holdings for those households that do invest in stocks. Habit formation increases wealth accumulation because the intertemporal consumption smoothing motive is stronger. As a result, households start participating in the stock market very early in life, and invest their portfolios almost fully in stocks. Therefore, we conclude that, with respect to its ability to match the empirical evidence on asset allocation behavior, the internal habit formation model is dominated by its time-separable utility counterpart.
Portfolio Choice Over The Business Cycle And The Life Cycle
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Author : Alexis Direr
language : en
Publisher:
Release Date : 2014
Portfolio Choice Over The Business Cycle And The Life Cycle written by Alexis Direr and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
Do households holding risky financial securities tend to invest in the stock market, buying at the top and selling at the bottom? Do they reduce their risk exposure with age and especially when approaching retirement? We answer these questions using data on retirement savings contracts from a large French insurer over the period 2002 to 2009. Subscribers can invest their savings in two types of investment vehicles: a euro fund composed primarily of money market securities with almost no risk, and unit-linked funds representing UCITS shares invested in risky securities. We show that the share of capital invested in unit-linked funds is sensitive to market conditions, but mainly at the date of subscription. Once the initial share has been selected, inertia of portfolio choice is observed as investors rarely revise their position subsequently. We observe a steep procyclicality of investment choices which can be explained by extrapolation of recent market performance. New subscribers buy risky assets when the stock market rises and stop buying them when it drops. This leads them to hold a minimum share of risky assets in 2004, a beginning of a 4-year rising phase and a maximum share in 2008 at the beginning of a fall market.We also find that the risky share declines with age once time effects are controlled for and cohort effects are excluded. The age profile also declines in the reverse configuration (taking into account cohort effects and excluding time effects) but the decline is less pronounced. After a discussion of the plausibility of the different effects, we estimate a probability of unit-linked detention which decreases by about 12 percentage points with age between ages 40 and 60, and a conditional equity share which decreases by about 6 percentage points with age between 40 and 60 years. This decrease is too small to bring the invested share to zero when approaching retirement.
Stock Market Participation Portfolio Choice And Pensions Over The Life Cycle
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Author : Steffan G. Ball
language : en
Publisher:
Release Date : 2008
Stock Market Participation Portfolio Choice And Pensions Over The Life Cycle written by Steffan G. Ball and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with Investment analysis categories.
Optimal Portfolio Choice For Long Horizon Investors With Nontradable Labor Income
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Author : Luis M. Viceira
language : en
Publisher:
Release Date : 2001
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 2001 with 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.