IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Consumption-investment problems with stochastic mortality risk

Author Info

Listed author(s):
  • Schendel, Lorenz S.
Registered author(s):

    Abstract

    I numerically solve realistically calibrated life cycle consumption-investment problems in continuous time featuring stochastic mortality risk driven by jumps, unspanned labor income as well as short-sale and liquidity constraints and a simple insurance. I compare models with deterministic and stochastic hazard rate of death to a model without mortality risk. Mortality risk has only minor effects on the optimal controls early in the life cycle but it becomes crucial in later years. A diffusive component in the hazard rate of death has no significant impact, whereas a jump component is desired by the agent and influences optimal controls and wealth evolution. The insurance is used to ensure optimal bequest such that there is no accidental bequest. In the absence of the insurance, the biggest part of bequest is accidental.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: https://www.econstor.eu/bitstream/10419/93144/1/780107209.pdf
    Download Restriction: no

    Paper provided by Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt in its series SAFE Working Paper Series with number 43.

    as
    in new window

    Length:
    Date of creation: 2014
    Handle: RePEc:zbw:safewp:43
    Contact details of provider: Postal:
    Theodor-W.-Adorno-Platz 3, D-60323 Frankfurt am Main

    Phone: +49 (0)69 798-30080
    Fax: +49 (0)69 798-30077
    Web page: http://safe-frankfurt.de/
    Email:


    More information through EDIRC

    Keywords: Stochastic mortality risk; Health jumps; Labor income risk; Portfolio choice; Insurance;

    Find related papers by JEL classification:

    • D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    This paper has been announced in the following NEP Reports:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Blanchet-Scalliet, Christophette & El Karoui, Nicole & Jeanblanc, Monique & Martellini, Lionel, 2008. "Optimal investment decisions when time-horizon is uncertain," Journal of Mathematical Economics, Elsevier, vol. 44(11), pages 1100-1113, December.
    2. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Dus, Ivica, 2008. "Following the rules: Integrating asset allocation and annuitization in retirement portfolios," Insurance: Mathematics and Economics, Elsevier, vol. 42(1), pages 396-408, February.
    3. 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.
    4. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
    5. Richard, Scott F., 1975. "Optimal consumption, portfolio and life insurance rules for an uncertain lived individual in a continuous time model," Journal of Financial Economics, Elsevier, vol. 2(2), pages 187-203, June.
    6. Marín-Solano, Jesús & Navas, Jorge, 2009. "Non-constant discounting in finite horizon: The free terminal time case," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 666-675, March.
    7. Huaxiong Huang & Moshe A. Milevsky & Jin Wang, 2008. "Portfolio Choice and Life Insurance: The CRRA Case," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(4), pages 847-872.
    8. 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.
    9. Menahem E. Yaari, 1965. "Uncertain Lifetime, Life Insurance, and the Theory of the Consumer," Review of Economic Studies, Oxford University Press, vol. 32(2), pages 137-150.
    10. Kraft, Holger & Steffensen, Mogens, 2008. "Optimal Consumption and Insurance: A Continuous-time Markov Chain Approach," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 38(01), pages 231-257, May.
    11. 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.
    12. Munk, Claus & Sørensen, Carsten, 2010. "Dynamic asset allocation with stochastic income and interest rates," Journal of Financial Economics, Elsevier, vol. 96(3), pages 433-462, June.
    13. 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.
    14. Blanchet-Scalliet, Christophette & El Karoui, Nicole & Martellini, Lionel, 2005. "Dynamic asset pricing theory with uncertain time-horizon," Journal of Economic Dynamics and Control, Elsevier, vol. 29(10), pages 1737-1764, October.
    15. Huaxiong Huang & Moshe A. Milevsky & Thomas S. Salisbury, 2012. "Optimal retirement consumption with a stochastic force of mortality," Papers 1205.2295, arXiv.org.
    16. Bernheim, B Douglas & Shleifer, Andrei & Summers, Lawrence H, 1986. "The Strategic Bequest Motive," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages 151-182, July.
    17. Luis M. Viceira, 2001. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," Journal of Finance, American Finance Association, vol. 56(2), pages 433-470, 04.
    18. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2009. "Asset allocation and location over the life cycle with investment-linked survival-contingent payouts," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1688-1699, September.
    19. Marín-Solano, Jesús & Navas, Jorge, 2010. "Consumption and portfolio rules for time-inconsistent investors," European Journal of Operational Research, Elsevier, vol. 201(3), pages 860-872, March.
    20. David A. Love, 2010. "The Effects of Marital Status and Children on Savings and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 385-432, January.
    21. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    22. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
    23. Bruhn, Kenneth & Steffensen, Mogens, 2011. "Household consumption, investment and life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 48(3), pages 315-325, May.
    24. Cocco, João F. & Gomes, Francisco J., 2012. "Longevity risk, retirement savings, and financial innovation," Journal of Financial Economics, Elsevier, vol. 103(3), pages 507-529.
    25. John Laitner, 2002. "Wealth Inequality and Altruistic Bequests," American Economic Review, American Economic Association, vol. 92(2), pages 270-273, May.
    26. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    27. Raimond Maurer & Olivia S. Mitchell & Ralph Rogalla & Vasily Kartashov, 2013. "Lifecycle Portfolio Choice With Systematic Longevity Risk and Variable Investment—Linked Deferred Annuities," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(3), pages 649-676, 09.
    28. Antoine Bommier, 2006. "Mortality, Time Preference and Life-Cycle Models," Working Papers hal-00441888, HAL.
    29. Pliska, Stanley R. & Ye, Jinchun, 2007. "Optimal life insurance purchase and consumption/investment under uncertain lifetime," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1307-1319, May.
    30. Abel, Andrew B, 1985. "Precautionary Saving and Accidental Bequests," American Economic Review, American Economic Association, vol. 75(4), pages 777-791, September.
    31. Kwak, Minsuk & Shin, Yong Hyun & Choi, U Jin, 2011. "Optimal investment and consumption decision of a family with life insurance," Insurance: Mathematics and Economics, Elsevier, vol. 48(2), pages 176-188, March.
    32. Lee Lockwood, 2012. "Bequest Motives and the Annuity Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 226-243, April.
    Full references (including those not matched with items on IDEAS)

    The CitEc project has not yet found citations to this item.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Access and download statistics

    When requesting a correction, please mention this item's handle: RePEc:zbw:safewp:43. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.