Portfolio Choice Over The Life Cycle In The Presence Of Trickle Down Labor Income
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| Author | : Luca Benzoni |
| Publisher | : |
| Total Pages | : 49 |
| Release | : 2005 |
| Genre | : Investments |
| ISBN | : |
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
| Author | : Yang Zhou |
| Publisher | : |
| Total Pages | : 48 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
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.
| Author | : Valery Polkovnichenko |
| Publisher | : |
| Total Pages | : 42 |
| Release | : 2005 |
| Genre | : |
| ISBN | : |
This paper explores the implications of the additive and endogenous habit formation preferences in the context of a life-cycle model of an investor who has stochastic uninsurable labor income. To solve the model, I analytically derive the habit - wealth feasibility constraints and show that they depend on the worst possible path of future labor income and on the habit strength, but not on the probability of the worst income. When there is only a slim chance of a severe income shock, the model implies much more conservative portfolios. The model also predicts that for some low to moderately wealthy households, the portfolio share allocated to stocks increases with wealth. Because of this feature, the model can generate more conservative portfolios for younger than for middle-aged households. One controversial finding is that for high values of the habit strength parameter, usually required for the resolution of asset pricing puzzles in general equilibrium, the life-cycle model predicts counterfactually high wealth accumulation.
| Author | : Luca Benzoni |
| Publisher | : |
| Total Pages | : 52 |
| Release | : 2011 |
| Genre | : |
| ISBN | : |
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.
| Author | : o F. Cocco |
| Publisher | : |
| Total Pages | : |
| Release | : 2013 |
| Genre | : |
| ISBN | : |
This article solves a realistically calibrated life cycle model of consumption and portfolio choice with non-tradable labor income and borrowing constraints. Since labor income substitutes for riskless asset holdings, the optimal share invested in equities is roughly decreasing over life. We compute a measure of the importance of human capital for investment behavior. We find that ignoring labor income generates large utility costs, while the cost of ignoring only its risk is an order of magnitude smaller, except when we allow for a disastrous labor income shock. Moreover, we study the implications of introducing endogenous borrowing constraints in this incomplete-markets setting.
| Author | : Rajnish Mehra |
| Publisher | : Elsevier |
| Total Pages | : 635 |
| Release | : 2011-08-11 |
| Genre | : Business & Economics |
| ISBN | : 0080555853 |
Edited by Rajnish Mehra, this volume focuses on the equity risk premium puzzle, a term coined by Mehra and Prescott in 1985 which encompasses a number of empirical regularities in the prices of capital assets that are at odds with the predictions of standard economic theory.
| Author | : |
| Publisher | : |
| Total Pages | : 136 |
| Release | : 2010 |
| Genre | : Finance |
| ISBN | : |
| Author | : Hela Cheikhrouhou |
| Publisher | : World Bank Publications |
| Total Pages | : 184 |
| Release | : 2007 |
| Genre | : Law |
| ISBN | : 0821371401 |
Structured Finance in Latin America explores how structured finance mechanisms can channel pension savings to support projects in underserved sectors, deepen capital markets, and contribute to investment and economic growth. Private pension funds have been accumulating assets rapidly in the wake of pension system reforms in many Latin American countries. Strict investment regulations to protect workers' savings have limited their investment in highly creditworthy domestic securities, yet pension fund demand for new securities has outstripped issuance of eligible traditional corporate debt instruments. This has contributed to a high concentration of pension fund assets in public debt. Innovative structured finance mechanisms can help bring to the market a new set of creditworthy securities backed by pools of loans to small borrowers, mortgage loans or the expected proceeds of large infrastructure projects. These mechanisms create new investment opportunities for pension funds, while establishing additional sources of funding for underserved market segments. Policy makers and regulatory authorities have a catalytic role to play in the development of structured finance securities by establishing a conducive legal, regulatory, and tax framework. Structured Finance in Latin America serves as a practical guide for development practitioners, policy makers, and others working in government, international or nongovernmental organizations, and financial institutions, who focus on finance and investment; infrastructure, transport, and urban development; housing finance; small and medium-sized enterprise development; and pension reform.
| Author | : National Bureau of Economic Research |
| Publisher | : |
| Total Pages | : 520 |
| Release | : 2005 |
| Genre | : Economics |
| ISBN | : |
| Author | : John Y. Campbell |
| Publisher | : |
| Total Pages | : 46 |
| Release | : 2006 |
| Genre | : Equilibrium (Economics) |
| ISBN | : |
In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital.
