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 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 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 Habit Formation and Lifetime Portfolio Selection written by Yoel Lax and published by . This book was released on 2001 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: A life cycle model in which an investor (a) faces i.i.d. asset returns, (b) receives no non-asset income, and (c) has an iso-elastic period utility function, predicts that the investor will allocate a constant fraction of his wealth to risky securities over his lifetime. This result is at odds with both economic intuition and the empirical evidence on asset allocation of individuals. In this work we investigate the effect that habit formation has on life cycle portfolio allocation. This amounts to relaxing assumption (c) by making period utility dependent on past consumption. We derive the optimal consumption and investment policies for a finitely-lived investor in discrete time and find that habit formation can explain increasingly conservative as well as hump-shaped investment patterns over the life cycle, both of which have been documented empirically. The crucial element determining which pattern obtains is the initial habit of a young investor. Furthermore we find that habit formation induces much stronger life cycle effects than those obtained by relaxing either assumptions (a) or (b): Return predictability is of negligible importance in a habit formation model, and labor income alone cannot generate hump-shaped investment patterns. Next we show that our basic results are robust to whether habit formation is introduced into the utility function as a difference or ratio, and to whether the habit stock consists of only one lag or a distributed lag of consumption. In contrast, the endogeneity of habit is crucial to our results--a model with a constant subsistence level, which is nested in our more general model, cannot produce the same life cycle investment patterns. Finally, we show that a continuous-time version of our habit model yields qualitatively different results.
Download or read book Portfolio Choice with Non expected Utility in Continuous Time written by Lars E. O. Svensson and published by . This book was released on 1988 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt:
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 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 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article explores the implications of 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. The effects of habits on portfolio choice are robust to income smoothing through borrowing or flexible labor supply. 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. (JEL: G11, G12).
Download or read book Developments in the Economics of Aging written by David A. Wise and published by University of Chicago Press. This book was released on 2009-08-01 with total page 431 pages. Available in PDF, EPUB and Kindle. Book excerpt: The number of Americans eligible to receive Social Security benefits will increase from forty-five million to nearly eighty million in the next twenty years. Retirement systems must therefore adapt to meet the demands of the largest aging population in our nation’s history. In Developments in the Economics of Aging, David A. Wise and a distinguished group of analysts examine the economic issues that will confront policy makers as they seek to design policies to protect the economic and physical health of these older Americans. The volume looks at such topics as factors influencing work and retirement decisions at older ages, changes in life satisfaction associated with retirement, and the shift in responsibility for managing retirement assets from professional money managers of traditional pension plans to individual account holders of 401(k)s. Developments in the Economics of Aging also addresses the complicated relationship between health and economic status, including why health behaviors vary across populations and how socioeconomic measures correlate with health outcomes.
Download or read book Portfolio Choice with Non expected Utility in Continous Time written by Lars E. O. Svensson and published by . This book was released on 1988 with total page 5 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Strategic Asset Allocation written by John Y. Campbell and published by Clarendon Lectures in Economic. This book was released on 2002 with total page 280 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
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 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 Time Is Time Was written by Daniel Shaviro and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: What time periods should we use in tax and other fiscal policy to evaluate people's circumstances, and thus to determine either how they are being treated, or how they ought to be? This question is both fundamental and pervasive.Standard economic reasoning offers grounds for entirely basing one's thinking on lifetime models. In particular, the closely related permanent income and life cycle hypotheses support employing a purely lifetime perspective in evaluating people's circumstances and treatment. The resulting model posits that people make decisions on a lifetime basis, seeking to optimize lifetime utility in the face of both (1) period-specific declining marginal utility of consumption, and (2) whatever preferences they happen to have as between consumption in different periods. Accordingly, in the presence of complete markets (including a lack of borrowing constraints), the question of when one earns a given dollar ostensibly makes no difference regarding when one spends it on consumption. And equivalently, when one pays a given dollar of tax will make no difference regarding how much one spends in any period.This model applies the same basic logic as a two-goods model in an Economics 101 casebook (featuring, say, pizza and movies), but in a far more complex setting in which its application is considerably more challenging. Despite its ruthless simplification, it likely has some degree of descriptive accuracy. People surely do make some plans across very long time horizons, such as early-life career choice, and subsequent planning (however imperfect it may be) for retirement.Yet the factors that undermine life cycle view's accuracy and normative relevance are not limited to borrowing constraints. Also of crucial importance are people's tendency to treat different periods as effectively separate, and a number of other constraints that would prevent them (even if so minded) from equalizing the marginal utility of consumption as between periods.In sum, therefore, the life cycle model is not sufficiently descriptively accurate to be treated as more than an important orienting benchmark. Like such other “it doesn't matter” theories as the Coase Theorem, the Efficient Markets Hypothesis, and the Modigliani-Miller Theorem, its value lies more in its showing us where to look for falsifying conditions, than in its actual empirical validity.
Download or read book Non Expected Utility Saving and Portfolios written by Christis Hassapis and published by . This book was released on 2008 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze life-cycle wealth accumulation and portfolio choice under career uncertainty and quantifiable departures from expected utility maximization. Our specification nests expected utility and three types of non-expected utility: 1) Kreps-Porteus preferences which disentangle risk aversion from elasticity of substitution, 2) Yaari's dual theory of choice, and 3) Quiggin's rank-dependent utility. The quot;first-order risk aversionquot; and kinked indifference curves in 2) and 3) are supposed to account for non-stockholding. We introduce conjectural equilibria and a computational algorithm appropriate when the ranking of outcomes matters for preferences and agents are faced with multiple risks. Computed wealth and stockholding, based on calibrated income processes for three education categories, are compared to the 1992 Survey of Consumer Finances. Rank-dependent utility enhances the importance of precautionary effects. Contrary to priors in the literature, solutions are not typically at kinks; neither kinks nor actual solutions involve zero stockholding when income risk is recognized, and yet predictions about average wealth and risky assets improve for all education categories. Mere disentangling of risk aversion from elasticity has small effects, while dual theory predictions are farther from the data and the signs of precautionary effects are reversed.
Download or read book The Foundations of Behavioral Economic Analysis written by Sanjit Dhami and published by Oxford University Press. This book was released on 2020-07-15 with total page 320 pages. Available in PDF, EPUB and Kindle. Book excerpt: This seventh volume of The Foundations of Behavioral Economic Analysis covers a range of topics in behavioral economics. It is an essential guide for advanced undergraduate and postgraduate students seeking a concise and focused text that explores the key areas of emotions in economics, behavioral welfare economics, and neuroeconomics. This updated extract from Dhami's leading textbook allows the reader to pursue subsections of this vast and rapidly growing field and to tailor their reading to their specific interests in behavioral economics.
Download or read book Consumption and Portfolio Decisions When Expected Returns are Time Varying written by John Y. Campbell and published by . This book was released on 2010 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes and implements a new approach to a classic unsolved problem in financial economics: the optimal consumption and portfolio choice problem of a long-lived investor facing time-varying investment opportunities. The investor is assumed to be infinitely-lived, to have recursive Epstein-Zin-Weil utility, and to choose in discrete time between a riskless asset with a constant return, and a risky asset with constant return variance whose expected log return follows and AR(1) process. The paper approximates the choice problem by log-linearizing the budget constraint and Euler equations, and derives an analytical solution to the approximate problem. When the model is calibrated to US stock market data it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by investors whose risk-aversion coefficients exceed one.
Download or read book Optimal Portfolio Consumption Leisure and Retirement Choice Problem with Ces Utility written by Kyoung Jin Choi and published by . This book was released on 2007 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study optimal portfolio, consumption-leisure and retirement choice of an infinitely-lived economic agent whose instantaneous preference is characterized by a constant elasticity of substitution(CES) function of consumption and leisure. We integrate in one model the optimal consumption-leisure-work choice, optimal portfolio selection, and the optimal stopping problem in which the agent chooses her retirement time. The economic agent derives utility from both consumption and leisure, and is able to adjust her supply of labor flexibly above a certain minimum work-hour, and also has a retirement option. We solve the problem analytically by considering a variational inequality arising from the dual functions of the optimal stopping problem. The optimal retirement time is characterized as the first time when her wealth exceeds a certain critical level. We provide the critical wealth level for retirement and characterize the optimal consumption-leisure and portfolio policy before and after retirement in closed forms. We also derive properties of the optimal policy. In particular, we show that consumption in general jumps around retirement. For the special case where the elasticity of substitution between consumption and leisure is equal to 1 we show that the option to retire reduces consumption and encourages risk taking.
