Intertemporal optimal portfolio choice based on labor income within shadow costs of incomplete information and short sales

Mondher Bellalah (), Yaosheng Xu () and Detao Zhang ()
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Mondher Bellalah: University of Cergy-Pontoise
Yaosheng Xu: Cornell University
Detao Zhang: Shandong University

Annals of Operations Research, 2019, vol. 281, issue 1, No 18, 397-422

Abstract: Abstract This paper examines the optimal portfolio choice in the presence of risky labor income, retirement horizon and shadow costs of incomplete information and short sales. The optimal allocation to stocks is larger for employed investors than for retired investors within idiosyncratic labor income risk, incomplete information and short sales. Investors’ willingness to save is increased when increasing idiosyncratic labor income risk in the presence of incomplete information and short sales, while it is decreased when retired investors still keep partial of their income flow. Hence, they reduce their stock portfolio allocation towards the level of retired investors. The presence of a positive correlation between labor income and stock returns reduces stockholdings below the level of retired investors within the assumptions of the existence of shadow costs of incomplete information. Our results generalize previous findings in the literature by accounting for the additional impact of information costs and short sales constraints.

Keywords: Optimal portfolio choice; Information cost; Short sales; Consumption; Labor income; Analytic hierarchy process (search for similar items in EconPapers)
JEL-codes: C61 G11 G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10479-018-2901-4

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