Download or read book Richer Earnings Dynamics Consumption and Portfolio Choice Over the Life Cycle written by Julio Gálvez and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Households face earnings risk which is non-normal and varies by age and over the income distribution. We show that allowing for these rich features of earnings dynamics, in the context of a structurally estimated life-cycle portfolio choice model, helps to rationalize the limited participation of households in the stock market and their low holdings of risky assets. Because households are subject to more background risk than previously considered, the estimated model implies a substantially lower coefficient of risk aversion. We also find renewed support for rule-of-thumb investment strategies under the model with the nonlinear earnings process.

Download or read book The Implications of Richer Earnings Dynamics for Consumption and Wealth written by Mariacristina De Nardi and published by . This book was released on 2016 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Earnings dynamics are much richer than those typically used in macro models with heterogenous agents. This paper provides multiple contributions. First, it proposes a simple non-parametric method to model rich earnings dynamics that is easy to estimate and introduce in structural models. Second, it applies our method to estimate a nonparametric earnings process using two data sets: the Panel Study of Income Dynamics and a large, synthetic, data set that matches the dynamics of the U.S. tax earnings. Third, it uses a life cycle model of consumption to compare the consumption and saving implications of our two estimated processes to those of a standard AR(1). We find that, unlike the standard AR(1) process, our estimated, richer earnings process generates an increase in consumption inequality over the life cycle that is consistent with the data and better fits the savings of the households at the bottom 60% of the wealth distribution.

Download or read book Consumption and Portfolio Choice Over the Life Cycle written by o F. Cocco and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Strategic Asset Allocation written by John Y. Campbell and published by OUP Oxford. This book was released on 2002-01-03 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Portfolio Choice with Internal Habit Formation written by Francisco Gomes and published by . This book was released on 2008 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Time Non separable Utility in Life cycle Consumption and Portfolio Choice written by Joseph P. Lupton and published by . This book was released on 2002 with total page 394 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Investing Retirement Wealth written by John Y. Campbell and published by . This book was released on 1999 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: If household portfolios are constrained by borrowing and short-sales restrictions asset markets, then alternative retirement savings systems may affect household welfare by relaxing these constraints. This paper uses a calibrated partial-equilibrium model of optimal life-cycle portfolio choice to explore the empirical relevance of these issues. In a benchmark case, we find ex-ante welfare gains equivalent to a 3.7% increase in consumption from the investment of half of retirement wealth in the equity market. The main channel through which these gains are realized is that the higher average return on equities permits a lower Social Security tax rate on younger households, which helps households smooth their consumption over the life cycle. There is a smaller welfare gain of 0.5% of consumption when Social Security tax rates are held constant. We also find that realistic heterogeneity of risk aversion and labor income risk can strongly affect optimal portfolio choice over the life cycle, which provides one argument for a privatized Social Security system with an element of personal portfolio choice

Download or read book Life Cycle Consumption and Portfolio Choice with an Imperfect Predictor written by Yuxin Zhang and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I study the effect of observable predictors that imperfectly predict conditional expected stock returns on optimal life-cycle consumption and portfolio choice in the presence of undiversifiable labor income risk. Investors filter the unobservable expected stock returns from realized predictive variables and stock returns. Young stockholders hold more conservative portfolios, better matching empirical observations, than models assuming a predictor perfectly delivering the conditional expected stock return or models assuming i.i.d. stock returns. Welfare losses from ignoring imperfect predictability can be substantial.

Download or read book Heterogeneity and Persistence in Returns to Wealth written by Andreas Fagereng and published by International Monetary Fund. This book was released on 2018-07-27 with total page 69 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Essays on Consumption Insurance and Portfolio Choice Over the Life Cycle written by Lorenz S. Schendel and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Simple Allocation Rules and Optimal Portfolio Choice Over the Lifecycle written by Victor Duarte and published by . This book was released on 2021 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a machine-learning solution algorithm to solve for optimal portfolio choice in a detailed and quantitatively-accurate lifecycle model that includes many features of reality modelled only separately in previous work. We use the quantitative model to evaluate the consumption-equivalent welfare losses from using simple rules for portfolio allocation across stocks, bonds, and liquid accounts instead of the optimal portfolio choices. We find that the consumption-equivalent losses from using an age-dependent rule as embedded in current target-date/lifecycle funds (TDFs) are substantial, around 2 to 3 percent of consumption, despite the fact that TDF rules mimic average optimal behavior by age closely until shortly before retirement. Our model recommends higher average equity shares in the second half of life than the portfolio of the typical TDF, so that the typical TDF portfolio does not improve on investing an age-independent 2/3 share in equity. Finally, optimal equity shares have substantial heterogeneity, particularly by wealth level, state of the business cycle, and dividend-price ratio, implying substantial gains to further customization of advice or TDFs in these dimensions.

Download or read book Predictors and Portfolios Over the Life Cycle written by Holger Kraft and published by . This book was released on 2018 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In a calibrated consumption-portfolio model with stock, housing, and labor income predictability, we evaluate the welfare effects of predictability on life-cycle consumption-portfolio choice. We compare skilled investors who are able to take advantage of all sources of predictability with unskilled investors ignoring predictability. For an unskilled investor the certainty equivalent of wealth is 0.3-6.8% lower than for a skilled investor, depending on the market entry date. We also determine the effect of luck to enter the market at a favorable time. Across market entry dates, skilled but unlucky investors can lose up to 15.4% compared to unskilled but lucky investors.

Download or read book Life Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk written by Valery Polkovnichenko and published by . This book was released on 2005 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book Lifetime Consumption Portfolio Choice Under Trading Constraints Recursive Preferences and Nontradeable Income written by Mark D. Schroder and published by . This book was released on 2003 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: We consider the lifetime consumption-portfolio problem in a competitive securities market with essentially arbitrary continuous price dynamics, a possibly nontradeable income stream, and convex constraints on the vector of market values of financial positions. (The setting extends Schroder and Skiadas, 2002, where the endowment is assumed tradeable and constraints are imposed in terms of wealth proportions.) For any utility function with a supergradient density, we develop the first-order conditions of optimality, a side-product being the characterization of a constrained notion of state-pricing. The methodology is applied to generalized continuous-time recursive utility, allowing for first and second-order risk-aversion that can depend on the risk source, reflecting the source's quot;ambiguity.quot; Within this class, we isolate a more tractable formulation in which preferences exhibit no wealth effects (an example being time-additive expected discounted exponential utility), and there is unrestricted trading in a money market and a suitably defined consol bond. In this case, we derive closed-form solutions for the optimal consumption and trading strategy in terms of the solution to a single constrained backward stochastic differential equation (BSDE), which in a Markovian setting maps to a PDE. Methodologically, we develop the utility gradient approach, but for the wealth-invariant case we also verify the solution using the dynamic programming approach, without having to assume a Markovian structure. Finally, we present a class of parametric examples in which the PDE characterizing the solution simplifies to a system of ordinary differential equations (of the Riccati type).

Download or read book Portfolio Choice Over the Life Cycle when the Stock and Labor Markets are Cointegrated written by Luca Benzoni and published by . This book was released on 2011 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.

Download or read book The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice written by Wei-Ting Pan and published by . This book was released on 2016 with total page 296 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Handbook of the Economics of Finance written by G. Constantinides and published by Elsevier. This book was released on 2003-11-04 with total page 698 pages. Available in PDF, EPUB and Kindle. Book excerpt: Arbitrage, State Prices and Portfolio Theory / Philip h. Dybvig and Stephen a. Ross / - Intertemporal Asset Pricing Theory / Darrell Duffle / - Tests of Multifactor Pricing Models, Volatility Bounds and Portfolio Performance / Wayne E. Ferson / - Consumption-Based Asset Pricing / John y Campbell / - The Equity Premium in Retrospect / Rainish Mehra and Edward c. Prescott / - Anomalies and Market Efficiency / William Schwert / - Are Financial Assets Priced Locally or Globally? / G. Andrew Karolyi and Rene M. Stuli / - Microstructure and Asset Pricing / David Easley and Maureen O'hara / - A Survey of Behavioral Finance / Nicholas Barberis and Richard Thaler / - Derivatives / Robert E. Whaley / - Fixed-Income Pricing / Qiang Dai and Kenneth J. Singleton.