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Labor income dynamics at business-cycle frequencies: Implications for portfolio choice

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  • Lynch, Anthony W.
  • Tan, Sinan
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    Abstract

    Young agents with low wealth-income ratios counter factually hold more stock than young, rich agents and old agents using the standard portfolio choice model with i.i.d. stock returns and labor income. This paper matches the countercyclical volatility and procyclical mean of U.S. labor income and finds that, consistent with U.S. data, young, poor agents now hold less stock than both young, rich agents and old agents, and no stock a large fraction of the time. Our results suggest that the predictability of labor income growth at a business-cycle frequency, particularly the countercyclical variation in volatility, plays an important role in a young agent's decision making about her portfolio's stock holding.

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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 101 (2011)
    Issue (Month): 2 (August)
    Pages: 333-359

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    Handle: RePEc:eee:jfinec:v:101:y:2011:i:2:p:333-359
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

    Keywords: Dynamic portfolio choice Labor income Life cycle Stock allocation Stock market participation;

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    Cited by:

    1. Doriana Ruffino, 2014. "Resuscitating Businessman Risk: A Rationale for Familiarity-Based Portfolios," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 107-130, January.
    2. Mark Huggett & Greg Kaplan, 2012. "The Money Value of a Man," Working Papers 2012-009, Human Capital and Economic Opportunity Working Group.
    3. John H. Cochrane, 2013. "A Mean-Variance Benchmark for Intertemporal Portfolio Theory," NBER Working Papers 18768, National Bureau of Economic Research, Inc.
    4. Massimo Guidolin & Stuart Hyde, 2012. "Optimal Portfolios for Occupational Funds under Time-Varying Correlations in Bull and Bear Markets? Assessing the Ex-Post Economic Value," Working Papers 455, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    5. Hammami, Yacine & Lindahl, Anna, 2014. "An intertemporal capital asset pricing model with bank credit growth as a state variable," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 14-28.
    6. Christensen, Peter Ove & Larsen, Kasper & Munk, Claus, 2012. "Equilibrium in securities markets with heterogeneous investors and unspanned income risk," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1035-1063.
    7. Fischer, Marcel & Kraft, Holger & Munk, Claus, 2013. "Asset allocation over the life cycle: How much do taxes matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2217-2240.

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