Optimal life-cycle portfolios for heterogeneous workers
AbstractHousehold portfolios include risky bonds, beyond stocks, and respond to permanent labour income shocks. This paper brings these features into a life-cycle setting, and shows that optimal stock investment is constant or increasing in age before retirement for realistic parameter combinations. The driver of such inversion in the life-cycle pro?le is the resolution of un- certainty regarding social security pension, which increases the investor?s risk appetite. This occurs if a small positive contemporaneous correlation between permanent labour income shocks and stock returns is matched by a realistically high variance of such shocks and/or risk aversion. Absent this combination, the typical downward sloping pro?le obtains. Overlooking dif- ferences in optimal investment pro?les across heterogeneous workers results in large welfare losses, in the order of 17-26% of lifetime consumption.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 266.
Length: 38 pages
Date of creation: 2012
Date of revision:
Life-cycle portfolio choice; background risk; age rule; investor heterogeneity; stock market participation;
Other versions of this item:
- Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2012. "Optimal life-cycle portfolios for heterogeneous workers," Working papers 012, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
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