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Asset Allocation With Endogenous Labor Income
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Book Synopsis Asset Allocation with Endogenous Labor Income by : Yeung Lewis Chan
Download or read book Asset Allocation with Endogenous Labor Income written by Yeung Lewis Chan and published by . This book was released on 2008 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates optimal consumption and portfolio decisions with nontradable labor income and flexible labor supply. This paper considers risky labor income in a setting where wage income and stock returns are not perfectly correlated. The paper provides approximate closed-form solutions to the problem, allowing for a thorough characterization of the optimal consumption and portfolio policies. These solutions show that, when labor income risk is idiosyncratic, the presence of labor/leisure choice can have dramatic positive effects on portfolio allocations relative to the benchmark in which labor income is exogenously given to the investor. The main mechanism delivering this result is that consumption becomes less sensitive to financial downfalls, thus raising the incentive to participate in the stock market.
Book Synopsis Asset Allocation in Incomplete Markets With Endogenous Labor Supply by : Rune Mølgaard
Download or read book Asset Allocation in Incomplete Markets With Endogenous Labor Supply written by Rune Mølgaard and published by . This book was released on 2008 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the consumption, labor and asset allocation problem of an agent, who is liquidity constrained and faces a stochastic wage that cannot be spanned by the available financial assets. The market is, as a result, incomplete. I also allow for simple trade restrictions which further increase the incompleteness of the economy. The optimal controls and the value function are characterized in terms of the viscosity solution of the associated Hamilton-Jacobi-Bellman equation, which is shown to exist and is characterized. The paper also shows that under a parameter restriction the viscosity solution is unique and for certain levels of risk aversion it is sufficiently smooth and coinciding with the classical solution which as a result exist and is unique. In addition the paper studies how the value function, consumption, labor and portfolio policies depend on the wealth to wage ratio. In particular it is shown that the wealth equivalent implicit value of the lifetime maximal wage income is increasing in the wealth to wage ratio and that for high wealth to wage ratios the agent will choose not to work. Finally the paper shows that the value function, the optimal consumption and the optimal portfolio weights approach the value function, the optimal consumption and the optimal portfolio weights respectively in a Merton (1969) setting without a labor-leisure choice, as the wealth to wage ratio goes to infinite.
Book Synopsis A Closed-Form Solution to the Continuous-Time Consumption Model with Endogenous Labor Income by : Aihua Zhang
Download or read book A Closed-Form Solution to the Continuous-Time Consumption Model with Endogenous Labor Income written by Aihua Zhang and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we study the consumption, labor supply, and portfolio decisions of an (infinitely-lived) individual who receives a certain wage rate and income from investment into a risky asset and a risk-free bond. Uncertainty about labor income arises endogenously, because labor supply evolves randomly over time in response to changes in financial wealth. We derive closed-form solutions for optimal consumption, labor supply and investment strategy. We find that deferring the retirement age stimulates optimal consumption over time and discourages optimal labor supply during the working life. We also find explicitly that optimal portfolio allocation becomes more 'conservative' when the individual approaches his prescribed retirement age. The effects of risk-aversion coefficients on optimal decisions are examined.
Book Synopsis Optimal Consumption and Investment with Labor Income Uncertainty and Endogenous Retirement by : Matthew M. Woolley
Download or read book Optimal Consumption and Investment with Labor Income Uncertainty and Endogenous Retirement written by Matthew M. Woolley and published by . This book was released on 2004 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper characterizes optimal consumption and investment policies for investors with asset return predictability, stochastic labor income and endogenously-determined retirement. We find that the ratio of total wealth-to-labor income (normalized wealth) is the primary determinant of the retirement decision and that at all ages, there exists a critical normalized wealth such that above this wealth, investors retire. We further consider the implications of endogenous retirement on portfolio choice. It is well known that human capital plays a large role in the determination of optimal equity proportion in financial portfolios. By endogenizing retirement, human capital becomes dependent on savings and investment decisions, which in turn depend on human capital. When compared to investors who exogenously retire at age 65, we find that low-wealth investors with the option to time retirement invest more aggressively while investors with slightly greater normalized wealth invest less aggressively prior to retirement. Investors with high normalized wealth behave almost the same as in the exogenous retirement case. This result contrasts the results in two recent papers and is due to the existence of stochastic labor income. Finally, we consider the impact of asset return/labor income correlation and find that equity holdings are nearly completely crowded-out by increased labor income (background) risk.
Book Synopsis Three Essays on Household Asset Allocation by : Yang Su
Download or read book Three Essays on Household Asset Allocation written by Yang Su and published by . This book was released on 2019 with total page 114 pages. Available in PDF, EPUB and Kindle. Book excerpt: With high-quality household level asset holding data becoming available as well as the exponential increase in computing power, there is a growing literature that studies how households make investment decisions facing various types of uninsurable background risks. In this dissertation, I build theoretical models and conduct empirical studies to investigate different problems on household asset allocation. In chapter 1, I build a life-cycle model of portfolio choice with endogenous labor supply and a fixed cost of labor market participation to incorporate both the extensive and intensive mar- gins of labor supply decisions. I show that the risky asset holdings of young agents (agents younger than 45-year-old) are lower when compared to a model that only incorporates the intensive margin of labor supply. The risky asset holdings of young agents are further reduced and become hump-shaped when two additional features are included to the model: 1) endogenous Social Security accumulation and 2) a small possibility of a zero-income state. These two features increase the uncertainties faced by the agents while the fixed cost of labor market participation reduces the agents's ability to use labor supply to buffer against future income uncertainties. My model therefore reduces the gap between the empirical observations on household risky asset holdings and the predictions made by life-cycle models with endogenous labor supply. In chapter 2, we build a three-period model to study asset allocation ("how much to invest") and location ("which account to use") consequences when an economic agent has internal habit formation utility and has access to both an illiquid but tax-favored retirement account and a taxable personal account. We show that the incentive to maintain high consumption relative to the habit level and the restriction of only having access to the personal account before retirement induces the agent to hold a safer portfolio in her personal account and a riskier portfolio in her retirement account, in accordance with empirical findings on retirement asset allocation. We also show that retirement asset allocation and location decisions are affected by bequest motives and employer match, providing policy implications for retirement plan designers. In chapter 3, I provide updated estimations of the age profiles of stock market participation and risky share in the United States using data from the Panel Study of Income Dynamics (PSID). This chapter is motivated by the recent findings of Fagereng, Gottlieb, and Guiso (2017) on Norwegian data that the age profiles of stock market participation rate and risky share become closer to theoretical predictions when they employ more precise empirical strategies to identify the age, cohort and year effects, control for demographic variables and use a Heckman selection model to control for the endogeneity of stock market participation decision. I apply the same empirical strategies in Fagereng et al. (2017) on the U.S. data. I find that the age profile of stock market participation rate is increasing over the life cycle instead of hump-shaped. The estimated conditional risky share, after controlling for selection, is higher than the risky shares reported in previous papers and it is slightly increasing over the life cycle.
Book Synopsis Endogenous Labor/Leisure/Investment Choice under Time Constraints by : Dong-Hyun Ahn
Download or read book Endogenous Labor/Leisure/Investment Choice under Time Constraints written by Dong-Hyun Ahn and published by . This book was released on 2010 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: We posit the time cost required for managing risky asset investment including conducting research and monitoring its performance. An economic agent, who should allocate a limited amount of time to labor, leisure and risky investment, is subject to the opportunity time cost, which is forgone labor or leisure. Our model investigates the change of the equity premium and volatility in the presence of such a time constraint. In particular, we derive the closed-form solutions for the risky asset returns, volatility, and risk-free rate in a simple equilibrium framework wherein agents have log utility. Our model is shown to yield the excess return and the volatility consistent with historical values observed in U.S. stock market even with a small amount of the time cost. In addition, we separate the impact of endogenous labor/leisure choice from the total changes on return dynamics by comparing with exogenous labor income case.
Book Synopsis Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk by : Valery Polkovnichenko
Download or read book Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk written by Valery Polkovnichenko and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article explores the implications of additive and endogenous habit formation preferences in the context of a life-cycle model of an investor who has stochastic uninsurable labor income. To solve the model, I analytically derive the habit-wealth feasibility constraints and show that they depend on the worst possible path of future labor income and on the habit strength, but not on the probability of the worst income. When there is only a slim chance of a severe income shock, the model implies much more conservative portfolios. The model also predicts that for some low to moderately wealthy households, the portfolio share allocated to stocks increases with wealth. Because of this feature, the model can generate more conservative portfolios for younger than for middle-aged households. The effects of habits on portfolio choice are robust to income smoothing through borrowing or flexible labor supply. One controversial finding is that for high values of the habit strength parameter, usually required for the resolution of asset pricing puzzles in general equilibrium, the life-cycle model predicts counterfactually high wealth accumulation. (JEL: G11, G12).
Book Synopsis Strategic Asset Allocation by : John Y. Campbell
Download or read book Strategic Asset Allocation written by John Y. Campbell and published by OUP Oxford. This book was released on 2002-01-03 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt: Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
Book Synopsis Extending Life Cycle Models of Optimal Portfolio Choice by :
Download or read book Extending Life Cycle Models of Optimal Portfolio Choice written by and published by . This book was released on 2009 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a realistically-calibrated model with stochastic mortality and uncertain labor income, we extend the investment universe to include not only stocks and bonds, but also survival-contingent payout annuities. We show that making labor supply endogenous raises older peoples' equity share; substantially increases work effort by the young; and markedly enhances lifetime welfare. Also, introducing annuities leads to earlier retirement and higher participation by the elderly in financial markets. Finally, if we allow for an age-dependent leisure preference parameter, this fits well with observed evidence in that it generates lower work hours and smaller equity holdings at older ages as well as sensible retirement age patterns.
Book Synopsis Implications of Homeownership for Endogenous Risk Aversion, Asset Pricing and Portfolio Composition by : Xuan Liang (Economist)
Download or read book Implications of Homeownership for Endogenous Risk Aversion, Asset Pricing and Portfolio Composition written by Xuan Liang (Economist) and published by . This book was released on 2015 with total page 99 pages. Available in PDF, EPUB and Kindle. Book excerpt: The dissertation studies the role of housing in asset pricing and household asset allocation. Housing is unique in the sense that it is both an asset and a consumption good. In addition, any adjustment in housing consumption will incur a non-convex adjustment cost. This makes housing adjustment infrequent. Due to these unique characteristics, the role of housing in a household portfolio is quite different from financial assets such as stocks and bonds. The first chapter, "The Housing CCAPM with Adjustment Costs and Heterogeneous Agents" examines how the inclusion of housing consumption in the utility function can increase the volatility and countercyclicality of the stochastic discount factor and thus help explain a higher level of equity premium despite only moderate curvature of the utility function. The keys to better performance of the model are (i) existence of the adjustment cost (ii) non-separability between housing goods and nondurable goods in the utility function and (iii) low substitutability between housing consumption and nondurable consumption. It is also shown that the housing CCAPM performs better than a standard CCAPM in explaining the variation of cross-sectional risk premia. Chapter 2, "Implications of the Housing Market for Endogenous Risk Aversion" studies household portfolio choice in a partial equilibrium model with housing consumption, adjustment costs, and varying housing prices. It is shown that household relative risk aversion is dependent on their house value to wealth ratio. Therefore, by changing the household's house value to wealth ratio, variation in house prices can affect household stock holdings through a change in household risk aversion. In addition, the model has two specific implications for households. The first is that volatile house price dynamics leads to more frequent moving. The second is that household moving leads to higher relative risk aversion. In general equilibrium, these effects would imply that volatile housing prices can lead to a higher moving frequency and thus result in a higher level of aggregate risk aversion, which would increase the price of risk in the risky asset markets. We provide empirical evidence that there is a high correlation between housing price volatility and the price of risk. Chapter 3, "Implications of the Housing Model for Moving Frequency, Relative Risk Aversion and the Portfolio Share of Risky Assets" tests the implications of the household portfolio choice model developed in Chapter 2 using household level data from the Panel Study of Income Dynamics and finds that the empirical evidence is consistent with the model. Firstly, we use cross-sectional variation in state level house prices and household moving to study the relationship between the volatility of house prices and moving frequency. Secondly, we use household moving and portfolio data to study the effect of moving on risk aversion. In addition, Chapter 3 also studies the effect of becoming unemployed on household moving by solving a model with housing consumption, adjustment costs, and a stochastic labor income process. The result suggests that the overall effect of unemployment is to reduce the frequency of moving. In addition, a sudden shift to an unemployed status can increase household risk aversion. Thus in general equilibrium, we would expect that a higher unemployment rate will increase economy wide risk aversion, which will in turn decrease the demand for stocks and increase the risk premium required. This provides a new channel (through the change in risk aversion) for the unemployment rate to affect asset prices.
Book Synopsis Optimal Portfolio Choice for Long-horizon Investors with Nontradable Labor Income by : Luis Manuel Viceira Alguacil
Download or read book Optimal Portfolio Choice for Long-horizon Investors with Nontradable Labor Income written by Luis Manuel Viceira Alguacil and published by . This book was released on 1999 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Consumption and Portfolio Choice Over the Life Cycle by : o F. Cocco
Download or read book Consumption and Portfolio Choice Over the Life Cycle written by o F. Cocco and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This article solves a realistically calibrated life cycle model of consumption and portfolio choice with non-tradable labor income and borrowing constraints. Since labor income substitutes for riskless asset holdings, the optimal share invested in equities is roughly decreasing over life. We compute a measure of the importance of human capital for investment behavior. We find that ignoring labor income generates large utility costs, while the cost of ignoring only its risk is an order of magnitude smaller, except when we allow for a disastrous labor income shock. Moreover, we study the implications of introducing endogenous borrowing constraints in this incomplete-markets setting.
Download or read book Asset Management written by Andrew Ang and published by Oxford University Press. This book was released on 2014-07-07 with total page 717 pages. Available in PDF, EPUB and Kindle. Book excerpt: In Asset Management: A Systematic Approach to Factor Investing, Professor Andrew Ang presents a comprehensive, new approach to the age-old problem of where to put your money. Years of experience as a finance professor and a consultant have led him to see that what matters aren't asset class labels, but instead the bundles of overlapping risks they represent. Factor risks must be the focus of our attention if we are to weather market turmoil and receive the rewards that come with doing so. Clearly written yet full of the latest research and data, Asset Management is indispensable reading for trustees, professional money managers, smart private investors, and business students who want to understand the economics behind factor risk premiums, to harvest them efficiently in their portfolios, and to embark on the search for true alpha.
Book Synopsis Handbook of Financial Econometrics by : Yacine Ait-Sahalia
Download or read book Handbook of Financial Econometrics written by Yacine Ait-Sahalia and published by Elsevier. This book was released on 2009-10-19 with total page 809 pages. Available in PDF, EPUB and Kindle. Book excerpt: This collection of original articles—8 years in the making—shines a bright light on recent advances in financial econometrics. From a survey of mathematical and statistical tools for understanding nonlinear Markov processes to an exploration of the time-series evolution of the risk-return tradeoff for stock market investment, noted scholars Yacine Aït-Sahalia and Lars Peter Hansen benchmark the current state of knowledge while contributors build a framework for its growth. Whether in the presence of statistical uncertainty or the proven advantages and limitations of value at risk models, readers will discover that they can set few constraints on the value of this long-awaited volume. Presents a broad survey of current research—from local characterizations of the Markov process dynamics to financial market trading activity Contributors include Nobel Laureate Robert Engle and leading econometricians Offers a clarity of method and explanation unavailable in other financial econometrics collections
Book Synopsis Financial Markets and the Real Economy by : John H. Cochrane
Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Book Synopsis Sustainable Asset Accumulation and Dynamic Portfolio Decisions by : Carl Chiarella
Download or read book Sustainable Asset Accumulation and Dynamic Portfolio Decisions written by Carl Chiarella and published by Springer. This book was released on 2016-09-01 with total page 203 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book examines sustainable wealth formation and dynamic decision-making. The global economy experienced a veritable meltdown of asset markets in the years 2007-9, where many funds were overexposed to risky returns and suffered considerable losses. On the other hand, the long-term upswing in the stock market since 2010 has led to asset price booms and some new, but also uneven, wealth formation. In this book a broader set of constraints and guidelines for asset management and wealth accumulation is developed. The authors investigate how wealth formation and the proper management of financial funds can help to adequately buffer income risk and obtain sufficient risk-free income at a later stage of life, while also being socially and environmentally sustainable. The book explores behavioral and institutional rules for decision-making that reflect such constraints and guidelines, without necessarily being optimal in the narrow sense. The authors explain the need for such a dynamic decision-making and dynamic re-balancing of portfolios, by putting forward dynamic programming as an approach to dynamic decision-making that can allow sustainable wealth accumulation and dynamic asset allocation to be successfully integrated. This book provides a clear and comprehensive treatment of asset accumulation and dynamic portfolio models with an emphasis on long term and sustainable wealth formation. An important concern in public debate is the sustainability of our economy and this book employs cutting edge quantitative techniques and models to highlight important facts that cannot be disputed under any reasonable assumptions. It has the potential to become a standard reference for both academic researchers and quantitatively trained practitioners. Eckhard Platen, Professor of Quantitative Finance, University of Technology Sydney, Australia This book should be read by both academics and practitioners alike. The former will find intellectually rigorous discussions and innovative solutions. The latter may find a few of the concepts a bit challenging. Yet, theory and technology are there to help simplify the work of those who worry about what time it is rather than how to make a watch--- but they do need a watch. Jean Brunel, Founder of Brunel Associates and Editor of The Journal of Wealth Management
Book Synopsis Overcoming the Saving Slump by : Annamaria Lusardi
Download or read book Overcoming the Saving Slump written by Annamaria Lusardi and published by University of Chicago Press. This book was released on 2009-10-15 with total page 406 pages. Available in PDF, EPUB and Kindle. Book excerpt: The great majority of working Americans are unprepared to face the difficult task of planning for retirement. In fact, the personal savings rate has been holding steady at zero for several years, down from 8 percent in the mid-1980s. Overcoming the Saving Slump explores the many challenges facing workers in the transition from a traditional defined benefit pension system to one that requires more individual responsibility, analyzing the considerable impediments to saving and evaluating financial literacy programs devised by employers and the government. Mapping the changing landscape of pensions and the rise of defined contribution plans, Annamaria Lusardi and others investigate new methods for stimulating saving and promoting financial education drawing on the experience of the United States as well as countries that have privatized their welfare systems, including Sweden and Chile. This timely volume pinpoints where human resources departments, the financial industry, and government officials have succeeded—or failed—in bridging the way to a new retirement system. As the workforce ages and more pensions disappear each second, Lusardi’s findings will be invaluable for economists and anyone facing retirement.
