Optimal Age-Based Portfolios with Stochastic Investment Opportunity Sets
AbstractIn an environment with stocks and short-term debt, random changes in the risk- reward frontier produce hedging demands for equities, implying that portfolio policies supporting optimal life-cycle consumption are rarely mean-variance e¢ cient. Pursuing optimal life-cycle portfolio policies is technologically feasible but it represents a sig- ni?cant burden for individuals and ?nancial ?rms acting as ?duciaries. As a result, investors often rely on relatively simple investment heuristics, most often age-based portfolio policies that rebalance the investor?s portfolio as a function of age alone. We ?nd that (i) the welfare losses associated with these policies are often negligible, so that the trade-o¤ between ?rst-best policies and simpler optimal age-based policies likely favors the approximate policy, and that (ii) not only do initial age-based portfolios display the same overall pattern as ?rst-best portfolios but they are also always within the same order of magnitude.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-041.
Length: 18 pages
Date of creation: Jul 2006
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- R. C. Merton, 1970.
"Optimum Consumption and Portfolio Rules in a Continuous-time Model,"
58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
- Jér�me B. Detemple & René Garcia & Marcel Rindisbacher, 2003.
"A Monte Carlo Method for Optimal Portfolios,"
Journal of Finance,
American Finance Association, vol. 58(1), pages 401-446, 02.
- Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
- Chacko, George & Viceira, Luis M, 2005.
"Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets,"
CEPR Discussion Papers
4913, C.E.P.R. Discussion Papers.
- George Chacko & Luis M. Viceira, 2005. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1369-1402.
- George Chacko & Luis M. Viceira, 1999. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," NBER Working Papers 7377, National Bureau of Economic Research, Inc.
- George CHACKO & Luis M. VICEIRA, 1999. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," FAME Research Paper Series rp11, International Center for Financial Asset Management and Engineering.
- MacKinlay, A. Craig, 1995. "Multifactor models do not explain deviations from the CAPM," Journal of Financial Economics, Elsevier, vol. 38(1), pages 3-28, May.
- Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Courtney Sullivan).
If references are entirely missing, you can add them using this form.