IDEAS home Printed from https://ideas.repec.org/a/ibf/gjbres/v4y2010i1p17-27.html

Job Security And Personal Investment Portfolio

Author

Listed:
  • Yan Alice Xie
  • Howard Qi

Abstract

This paper incorporates human capital into the well-established portfolio theory by allowing for job security in personal portfolio choice. Our model predicts that young people hold more cash to hedge against risk associated with human capital (layoff risk). As people age, layoff risk decreases, and consequently, they invest in more risky assets – stocks in their portfolios. However, as people approach retirement, their human capital diminishes, and they become more risk averse. Hence, they hold more cash again. Our model provides a plausible explanation for the observed investment behavior of people who reveal humped shape stock holdings over the life cycle. Our results suggest that financial advisors should take into account different levels of job security when giving financial advice to different individuals.

Suggested Citation

  • Yan Alice Xie & Howard Qi, 2010. "Job Security And Personal Investment Portfolio," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 4(1), pages 17-27.
    • Handle: RePEc:ibf:gjbres:v:4:y:2010:i:1:p:17-27
    as

    Download full text from publisher

    File URL: http://www.theibfr2.com/RePEc/ibf/gjbres/gjbr-v4n1-2010/GJBR-V4N1-2010-2.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Francisco J. Gomes & Laurence J. Kotlikoff & Luis M. Viceira, 2008. "Optimal Life-Cycle Investing with Flexible Labor Supply: A Welfare Analysis of Life-Cycle Funds," American Economic Review, American Economic Association, vol. 98(2), pages 297-303, May.
    2. Valery Polkovnichenko, 2007. "Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk," The Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 83-124, January.
    3. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    4. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
    5. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
    6. Francisco Gomes & Alexander Michaelides, 2005. "Optimal Life‐Cycle Asset Allocation: Understanding the Empirical Evidence," Journal of Finance, American Finance Association, vol. 60(2), pages 869-904, April.
    7. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    8. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    2. Zvi Bodie & Jérôme Detemple & Marcel Rindisbacher, 2009. "Life-Cycle Finance and the Design of Pension Plans," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 249-286, November.
    3. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    4. Robert Östling & Erik Lindqvist & David Cesarini & Joseph Briggs, 2016. "Wealth, Portfolio Allocations, and Risk Preference," 2016 Meeting Papers 1089, Society for Economic Dynamics.
    5. Horneff, Wolfram J. & Maurer, Raimond H. & Stamos, Michael Z., 2008. "Life-cycle asset allocation with annuity markets," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3590-3612, November.
    6. Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2014. "Optimal Life-Cycle Portfolios for Heterogeneous Workers," Review of Finance, European Finance Association, vol. 18(6), pages 2283-2323.
    7. Campanale Claudio & Fugazza Carolina, 2022. "Preference for Wealth and Life Cycle Portfolio Choice," Working papers 075, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    8. 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.
    9. Wolfram Horneff & Raimond Maurer & Michael Stamos, 2006. "Life-Cycle Asset Allocation with Annuity Markets: Is Longevity Insurance a Good Deal?," Working Papers wp146, University of Michigan, Michigan Retirement Research Center.
    10. Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2017. "A Life-Cycle Model with Unemployment Traps," Carlo Alberto Notebooks 514, Collegio Carlo Alberto, revised 2019.
      • Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2017. "A Life-Cycle Model with Unemployment Traps," Working papers 041, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    11. Kaschützke, B. & Maurer, R., 2016. "Investing and Portfolio Allocation for Retirement," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 567-608, Elsevier.
    12. Russell Cooper & Guozhong Zhu, 2016. "Household Finance over the Life-Cycle: What does Education Contribute?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 63-89, April.
    13. Hubar, Sylwia & Koulovatianos, Christos & Li, Jian, 2020. "The role of labor-income risk in household risk-taking," European Economic Review, Elsevier, vol. 129(C).
    14. Jingjing Chai & Wolfram Horneff & Raimond Maurer & Olivia S. Mitchell, 2009. "Extending Life Cycle Models of Optimal Portfolio Choice: Integrating Flexible Work, Endogenous Retirement, and Investment Decisions with Lifetime Payouts," Working Papers wp204, University of Michigan, Michigan Retirement Research Center.
    15. Jingjing Chai & Wolfram Horneff & Raimond Maurer & Olivia S. Mitchell, 2011. "Optimal Portfolio Choice over the Life Cycle with Flexible Work, Endogenous Retirement, and Lifetime Payouts," Review of Finance, European Finance Association, vol. 15(4), pages 875-907.
    16. Jin, Fangyi, 2011. "Revisiting the composition puzzles of the household portfolio: New evidence," Review of Financial Economics, Elsevier, vol. 20(2), pages 63-73, May.
    17. Hans Fehr & Sabine Jokisch, 2006. "Demographischer Wandel und internationale Finanzmärkte," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(4), pages 501-517, November.
    18. 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.
    19. Lynch, Anthony W. & Tan, Sinan, 2011. "Labor income dynamics at business-cycle frequencies: Implications for portfolio choice," Journal of Financial Economics, Elsevier, vol. 101(2), pages 333-359, August.
    20. Servaas van Bilsen & Roger J. A. Laeven & Theo E. Nijman, 2020. "Consumption and Portfolio Choice Under Loss Aversion and Endogenous Updating of the Reference Level," Management Science, INFORMS, vol. 66(9), pages 3927-3955, September.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibf:gjbres:v:4:y:2010:i:1:p:17-27. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mercedes Jalbert The email address of this maintainer does not seem to be valid anymore. Please ask Mercedes Jalbert to update the entry or send us the correct address (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.