Optimal portfolio choice with asset return predictability and nontradable labor income

Optimal portfolio choice with asset return predictability and nontradable labor income We study the optimal consumption and investment choice for long-horizon investors with nontradable labor income and time-varying investment opportunities. Our results suggest that the popular investment recommendation that more conservative investors should hold a higher bond/stock ratio may lack theoretical justification when labor income is considered. When labor income is positively correlated with stock returns, a more risk-averse investor holds a higher bond/stock ratio in her risky portfolio, but the reverse is true when labor income is positively correlated with bond returns. The allocation to stock inherits the inverted U-shaped pattern of labor income growth with respect to expected time until retirement. Investors with lower income growth, namely, younger workers or those near retirement, should invest less in risky assets than those who are in their mid career and have a higher income growth. Performance test shows that the welfare loss of ignoring asset return predictability in the presence of nontradable labor income can be economically significant. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Optimal portfolio choice with asset return predictability and nontradable labor income

Loading next page...
 
/lp/springer_journal/optimal-portfolio-choice-with-asset-return-predictability-and-wpGDsqRxAW
Publisher
Springer Journals
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-014-0435-7
Publisher site
See Article on Publisher Site

Abstract

We study the optimal consumption and investment choice for long-horizon investors with nontradable labor income and time-varying investment opportunities. Our results suggest that the popular investment recommendation that more conservative investors should hold a higher bond/stock ratio may lack theoretical justification when labor income is considered. When labor income is positively correlated with stock returns, a more risk-averse investor holds a higher bond/stock ratio in her risky portfolio, but the reverse is true when labor income is positively correlated with bond returns. The allocation to stock inherits the inverted U-shaped pattern of labor income growth with respect to expected time until retirement. Investors with lower income growth, namely, younger workers or those near retirement, should invest less in risky assets than those who are in their mid career and have a higher income growth. Performance test shows that the welfare loss of ignoring asset return predictability in the presence of nontradable labor income can be economically significant.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Feb 2, 2014

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create lists to
organize your research

Export lists, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off