Household portfolios include risky bonds, beyond stocks, and respond to permanent labor income shocks. This article brings these features into a life-cycle setting, and shows that optimal stock investment is constant or increasing in age before retirement for realistic parameter combinations. The driver of such inversion in the life-cycle profile is the resolution of uncertainty regarding social security pension, which increases the investor' s risk appetite. This occurs if a small positive contemporaneous correlation between permanent labor income shocks and stock returns is matched by a realistically high degree of risk aversion. Absent this combination, the typical downward-sloping profile obtains. Overlooking differences in optimal investment profiles across heterogeneous workers results in large welfare losses, in the order of 15-30% of lifetime consumption. © © The Authors 2013. Published by Oxford University Press on behalf of the European Finance Association

Bagliano, F., Fugazza, C., Nicodano, G. (2013). Optimal Life-Cycle Portfolios for Heterogeneous Workers. REVIEW OF FINANCE, 18(6), 2283-2323 [10.1093/rof/rft046].

Optimal Life-Cycle Portfolios for Heterogeneous Workers

FUGAZZA, CAROLINA
Secondo
;
2013

Abstract

Household portfolios include risky bonds, beyond stocks, and respond to permanent labor income shocks. This article brings these features into a life-cycle setting, and shows that optimal stock investment is constant or increasing in age before retirement for realistic parameter combinations. The driver of such inversion in the life-cycle profile is the resolution of uncertainty regarding social security pension, which increases the investor' s risk appetite. This occurs if a small positive contemporaneous correlation between permanent labor income shocks and stock returns is matched by a realistically high degree of risk aversion. Absent this combination, the typical downward-sloping profile obtains. Overlooking differences in optimal investment profiles across heterogeneous workers results in large welfare losses, in the order of 15-30% of lifetime consumption. © © The Authors 2013. Published by Oxford University Press on behalf of the European Finance Association
Articolo in rivista - Articolo scientifico
income risk; asset allocation; labor income; choice; returns; diversification; consumption; constraints; investors; benefit
English
2013
18
6
2283
2323
none
Bagliano, F., Fugazza, C., Nicodano, G. (2013). Optimal Life-Cycle Portfolios for Heterogeneous Workers. REVIEW OF FINANCE, 18(6), 2283-2323 [10.1093/rof/rft046].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/78812
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