Retirement Flexibility and Portfolio Choice in General Equilibrium
AbstractThis paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model of a closed economy. Retirement flexibility is often seen as a hedge against capital market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement flexibility is weakened - and under some conditions even turned around - if not only capital market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-038/2/DSF13.
Date of creation: 17 Feb 2011
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Web page: http://www.tinbergen.nl
portfolio choice; retirement (in)flexibility; productivity and depreciation risk; intratemporal substitution; general equilibrium;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
This paper has been announced in the following NEP Reports:
- NEP-AGE-2011-03-26 (Economics of Ageing)
- NEP-ALL-2011-03-26 (All new papers)
- NEP-DGE-2011-03-26 (Dynamic General Equilibrium)
- NEP-MAC-2011-03-26 (Macroeconomics)
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