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Occupation-Level Income Shocks and Asset Returns: Their Covariance and Implications for Portfolio Choice

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  • STEVEN J. DAVIS
  • PAUL WILLEN

Abstract

This paper develops and applies a simple graphical approach to portfolio selection that accounts for covariance between asset returns and an investor's labor income. Our graphical approach easily handles income shocks that are partly hedgeable, multiple risky assets, multiple risky assets, many periods, and life cycle considerations.

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Bibliographic Info

Paper provided by Center for Research in Security Prices, Graduate School of Business, University of Chicago in its series CRSP working papers with number 523.

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Date of creation: Aug 2000
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Handle: RePEc:wop:chispw:523

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References

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  1. Ravi Jagannathan & Narayana R. Kocherlakota, 1996. "Why should older people invest less in stock than younger people?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Sum, pages 11-23.
  2. João Cocco & Francisco Gomes & Pascal Maenhout, 1998. "Consumption and Portfolio Choice over the Life-Cycle," Center for Economic Studies - Discussion papers, Katholieke Universiteit Leuven, Centrum voor Economische Studiën ces9805, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  3. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, Elsevier, vol. 18(1), pages 83-114, January.
  4. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, Elsevier, vol. 5(3), pages 308-335, December.
  5. Marianne Baxter & Urban J. Jermann, 1995. "The International Diversification Puzzle is Worse Than You Think," NBER Working Papers 5019, National Bureau of Economic Research, Inc.
  6. Katz, L.F. & Murphy, K.M., 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," Harvard Institute of Economic Research Working Papers 1580, Harvard - Institute of Economic Research.
  7. John H. Cochrane, 1999. "New Facts in Finance," NBER Working Papers 7169, National Bureau of Economic Research, Inc.
  8. repec:cup:macdyn:v:1:y:1997:i:1:p:76-101 is not listed on IDEAS
  9. Canner, Niko & Mankiw, N Gregory & Weil, David N, 1997. "An Asset Allocation Puzzle," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 181-91, March.
  10. Haliassos, Michalis & Michaelides, Alexander, 2001. "Portfolio Choice and Liquidity Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2822, C.E.P.R. Discussion Papers.
  11. Luis M. Viceira, 1999. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," NBER Working Papers 7409, National Bureau of Economic Research, Inc.
  12. Zvi Bodie & Robert C. Merton & William F. Samuelson, 1992. "Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model," NBER Working Papers 3954, National Bureau of Economic Research, Inc.
  13. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  14. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
  15. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  16. Heaton, John & Lucas, Deborah, 1997. "Market Frictions, Savings Behavior, And Portfolio Choice," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 1(01), pages 76-101, January.
  17. Rose, Nancy L, 1987. "Labor Rent Sharing and Regulation: Evidence from the Trucking Industry," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 95(6), pages 1146-78, December.
  18. Fama, Eugene F. & Schwert, G. William, 1977. "Human capital and capital market equilibrium," Journal of Financial Economics, Elsevier, Elsevier, vol. 4(1), pages 95-125, January.
  19. Steven J. Davis & Jeremy Nalewaik & Paul Willen, 2000. "On the Gains to International Trade in Risky Financial Assets," NBER Working Papers 7796, National Bureau of Economic Research, Inc.
  20. Bottazzi, Laura & Pesenti, Paolo & van Wincoop, Eric, 1996. "Wages, profits and the international portfolio puzzle," European Economic Review, Elsevier, Elsevier, vol. 40(2), pages 219-254, February.
  21. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 55(3), pages 1163-1198, 06.
  22. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, American Finance Association, vol. 51(1), pages 55-84, March.
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