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Occupation-level income shocks and asset returns: their covariance and implications for portfolio choice

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Abstract

This paper develops and applies a simple graphical approach to portfolio selection that accounts for covariance between asset returns and an investor's labor income. Our graphical approach easily handles income shocks that are partly hedgeable, multiple risky assets, multiple risky assets, many periods, and life cycle considerations.

Suggested Citation

  • Steven J. Davis & Paul S. Willen, 2013. "Occupation-level income shocks and asset returns: their covariance and implications for portfolio choice," Working Papers 13-9, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:13-9
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    1. Steven J. Davis & Felix Kubler & Paul Willen, 2006. "Borrowing Costs and the Demand for Equity over the Life Cycle," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 348-362, May.
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    9. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472, World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    Keywords

    life cycle portfolio choice; risky labor income; graphical approach; occupation-level income shocks;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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