A portfolio choice problem under risk capacity constraint

Weidong Tian () and Zimu Zhu ()
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Weidong Tian: University of North Carolina at Charlotte
Zimu Zhu: University of Southern California

Annals of Finance, 2022, vol. 18, issue 3, No 1, 285-326

Abstract: Abstract This paper studies the asset allocation problem for a retiree facing longevity risk and living standard risk. We introduce a risk capacity constraint to reduce the living standard risk in the retirement period. Whether the retiree focuses on intertemporal consumption or inheritance wealth, we demonstrate a unique number to measure the expected lump sum of the spending post-retirement. The optimal portfolio is nearly neutral to the stock market movement if the portfolio’s value is higher than this critical value; otherwise, the retiree actively invests in the stock market. As a comparison, we consider a dynamic leverage constraint and show that the corresponding optimal portfolio would lose significantly in stressed markets.

Keywords: Risk capacity; Retirement portfolio; Longevity risk; Leverage constraint (search for similar items in EconPapers)
JEL-codes: D52 D90 G11 G12 G13 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10436-021-00404-5

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