Optimal life-cycle portfolios for heterogeneous workers

Fabio Bagliano, Carolina Fugazza () and Giovanna Nicodano

No 12, Working papers from Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino

Abstract: Household portfolios include risky bonds, beyond stocks, and respond to permanent labour income shocks. This paper 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 labour income shocks and stock returns is matched by a realistically high variance of such shocks and/or 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 17-26% of lifetime consumption.

Keywords: Life-cycle portfolio choice; background risk; age rule; investor heterogeneity; stock market participation (search for similar items in EconPapers)
JEL-codes: D91 G11 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2012-09
New Economics Papers: this item is included in nep-age and nep-dge
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http://www.bemservizi.unito.it/repec/tur/wpapnw/m12.pdf First version, 2012 (application/pdf)

Related works:
Journal Article: Optimal Life-Cycle Portfolios for Heterogeneous Workers (2014)
Working Paper: Optimal life-cycle portfolios for heterogeneous workers (2013)
Working Paper: Optimal life-cycle portfolios for heterogeneous workers (2013)
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