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Dynamic asset allocation when bequests are luxury goods

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  • Ding, Jie
  • Kingston, Geoffrey
  • Purcal, Sachi

Abstract

Luxury bequests impart systematic effects of age to an investor's optimal allocation: the expected percentage allocation to equities rises throughout retirement. When bequests are luxuries the marginal utility of bequests declines more slowly than the marginal utility of consumption. This is essentially lower risk aversion. As a retiree approaches death, her expected remaining lifetime utility is increasingly composed of bequest utility, and thus generates progressively lower risk aversion. A retiree responds by increasingly favoring the higher-return risky asset. Compared to standard preferences, luxury bequests elevate a retiree's average exposure to the risky asset, but the difference is small in early retirement.

Suggested Citation

  • Ding, Jie & Kingston, Geoffrey & Purcal, Sachi, 2014. "Dynamic asset allocation when bequests are luxury goods," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 65-71.
    • Handle: RePEc:eee:dyncon:v:38:y:2014:i:c:p:65-71
    DOI: 10.1016/j.jedc.2013.11.004
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    Citations

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    Cited by:

    1. Jinhui Zhang & Sachi Purcal & Jiaqin Wei, 2017. "Optimal Time to Enter a Retirement Village," Risks, MDPI, vol. 5(1), pages 1-20, March.
    2. Johan G. Andréasson & Pavel V. Shevchenko, 2017. "Assessment of Policy Changes to Means-Tested Age Pension Using the Expected Utility Model: Implication for Decisions in Retirement," Risks, MDPI, vol. 5(3), pages 1-21, September.
    3. Fedor Iskhakov & Susan Thorp & Hazel Bateman, 2015. "Optimal Annuity Purchases for Australian Retirees," The Economic Record, The Economic Society of Australia, vol. 91(293), pages 139-154, June.
    4. Geoffrey Kingston & Susan Thorp, 2019. "Superannuation in Australia: A Survey of the Literature," The Economic Record, The Economic Society of Australia, vol. 95(308), pages 141-160, March.
    5. Hazel Bateman & Christine Eckert & Fedor Iskhakov & Jordan Louviere & Stephen Satchell & Susan Thorp, 2017. "Default and naive diversification heuristics in annuity choice," Australian Journal of Management, Australian School of Business, vol. 42(1), pages 32-57, February.
    6. Andréasson, Johan G. & Shevchenko, Pavel V. & Novikov, Alex, 2017. "Optimal consumption, investment and housing with means-tested public pension in retirement," Insurance: Mathematics and Economics, Elsevier, vol. 75(C), pages 32-47.
    7. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 32, July-Dece.
    8. Johan G. Andreasson & Pavel V. Shevchenko & Alex Novikov, 2016. "Optimal Consumption, Investment and Housing with Means-tested Public Pension in Retirement," Papers 1606.08984, arXiv.org.
    9. Wen Chen & Nicolas Langren'e, 2020. "Deep neural network for optimal retirement consumption in defined contribution pension system," Papers 2007.09911, arXiv.org, revised Jul 2020.
    10. Choi, Sungsub & Kim, Sungjun & Shim, Gyoocheol, 2016. "Effect of lifetime uncertainty on consumption/investment with luxury bequest motives," Finance Research Letters, Elsevier, vol. 17(C), pages 275-279.
    11. Johan G. Andreasson & Pavel V. Shevchenko, 2016. "The 2015-2017 policy changes to the means-tests of Australian Age Pension: implication to decisions in retirement," Papers 1611.08330, arXiv.org.
    12. Geoffrey Kingston & Lance Fisher, 2014. "Down the Retirement Risk Zone with Gun and Camera," Economic Papers, The Economic Society of Australia, vol. 33(2), pages 153-162, June.
    13. Hyeng Keun Koo & Kum-Hwan Roh & Yong Hyun Shin, 2021. "Optimal consumption/investment and retirement with necessities and luxuries," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 94(2), pages 281-317, October.
    14. Shao, Adam W. & Chen, Hua & Sherris, Michael, 2019. "To borrow or insure? Long term care costs and the impact of housing," Insurance: Mathematics and Economics, Elsevier, vol. 85(C), pages 15-34.
    15. Zhang, Jinhui & Purcal, Sachi & Wei, Jiaqin, 2021. "Optimal life insurance and annuity demand under hyperbolic discounting when bequests are luxury goods," Insurance: Mathematics and Economics, Elsevier, vol. 101(PA), pages 80-90.
    16. Wen Chen & Nicolas Langrené, 2020. "Deep neural network for optimal retirement consumption in defined contribution pension system [Réseau de neurones profond pour consommation à la retraite optimale en système de retraite à cotisatio," Working Papers hal-02909818, HAL.
    17. Wei-Ting Pan, 2016. "The Impact of Mandatory Savings on Life Cycle Consumption and Portfolio Choice," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2016.

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    More about this item

    Keywords

    Bequests; Luxury goods; Dynamic asset allocation; Merton portfolio problem; European put option; Retirement risk zone;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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