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Consumption and portfolio selection with labor income: A discrete-time approach

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  • Hyeng Keun Koo

Abstract

This paper studies the consumption and portfolio selection problem of an agent who is liquidity constrained and has uninsurable income risk in a discrete time setting. It gives properties of optimal policies and presents numerical solutions. The paper, in particular, shows that liquidity constraints and uninsurable income risk reduce consumption and investment in the risky asset substantially from the levels for the case where no market imperfections exist. This paper also shows how the agent evaluates his or her human capital and relates the evaluation to optimal decisions. Copyright Springer-Verlag Berlin Heidelberg 1999

Suggested Citation

  • Hyeng Keun Koo, 1999. "Consumption and portfolio selection with labor income: A discrete-time approach," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 50(2), pages 219-243, October.
    • Handle: RePEc:spr:mathme:v:50:y:1999:i:2:p:219-243
    DOI: 10.1007/s001860050096
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    Citations

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    Cited by:

    1. Luc Arrondel & Hector Calvo Pardo & Xisco Oliver, 2007. "Temperant portfolio choice and background risk: evidence from France," Working Papers halshs-00588069, HAL.
    2. 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.
    3. Hui-Ju Tsai & Yangru Wu, 2015. "Optimal portfolio choice with asset return predictability and nontradable labor income," Review of Quantitative Finance and Accounting, Springer, vol. 45(1), pages 215-249, July.
    4. Letendre, Marc-Andre & Smith, Gregor W., 2001. "Precautionary saving and portfolio allocation: DP by GMM," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 197-215, August.
    5. Andersson, Björn, 2001. "Portfolio Allocation over the Life Cycle: Evidence from Swedish Household Data," Working Paper Series 2001:4, Uppsala University, Department of Economics.
    6. Luc Arrondel & Hector Calvo Pardo & Xisco Oliver, 2010. "Temperance in Stock Market Participation: Evidence from France," Economica, London School of Economics and Political Science, vol. 77(306), pages 314-333, April.
    7. Wonnho Choi, 2018. "Consumption-based capital asset pricing models: issues and controversies," Review of Quantitative Finance and Accounting, Springer, vol. 50(1), pages 181-205, January.
    8. Xiaohong Angerer & Pok‐Sang Lam, 2009. "Income Risk and Portfolio Choice: An Empirical Study," Journal of Finance, American Finance Association, vol. 64(2), pages 1037-1055, April.
    9. Chung, Kee H. & Smith, William T. & Wu, Tao L., 2009. "Time diversification: Definitions and some closed-form solutions," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1101-1111, June.

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