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Optimal portfolio choice for investors with industry-specific labor income risks

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  • Tsai, Hui-Ju
  • Wu, Yangru

Abstract

We study optimal investment decisions for long-horizon investors with industry-specific labor income risks. We find that in addition to the volatility of labor income growth, the correlation between labor income and risky asset returns is another important factor that affects the optimal portfolio decisions and may provide a plausible explanation for the mixed empirical evidence of the relationship between labor income risk and portfolio holdings. Depending on its relative covariance with stock and bond returns, labor income may help resolve or deepen the asset allocation puzzle.

Suggested Citation

  • Tsai, Hui-Ju & Wu, Yangru, 2014. "Optimal portfolio choice for investors with industry-specific labor income risks," Finance Research Letters, Elsevier, vol. 11(4), pages 429-436.
    • Handle: RePEc:eee:finlet:v:11:y:2014:i:4:p:429-436
    DOI: 10.1016/j.frl.2014.07.004
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    References listed on IDEAS

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    Cited by:

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    2. Ñíguez, Trino-Manuel & Paya, Ivan & Peel, David, 2016. "Pure higher-order effects in the portfolio choice model," Finance Research Letters, Elsevier, vol. 19(C), pages 255-260.

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    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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