Precautionary Saving And Portfolio Allocation: Dp By Gmm

Marc-Andre Letendre and Gregor Smith
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Marc-Andre Letendre: McMaster University

No 1247, Working Paper from Economics Department, Queen's University

Abstract: There is much research on consumption-savings problems with risky labor incomeand a constant interest rate and also on portfolio allocation with risky returns but nonstochastic labor income. Less is known quantitatively about the interaction between the two forms of risk. Under CRRA utility, undiversifiable income risk should be reflected in both savings rates and portfolio allocations. To quantify these effects in a model of consumptionand portfolio choice, we adopt a semi-parametric projection method for solving dynamic programmes, based on generalized method of moments estimation of the parametersof approximate decision rules. We find that background income risk does affect optimal portfolios but that this effect may be difficult to detect empirically.

Keywords: portfolio theory; precautionary saving (search for similar items in EconPapers)
JEL-codes: C63 D91 G11 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2000-08
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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1247.pdf First version 2000 (application/pdf)

Related works:
Journal Article: Precautionary saving and portfolio allocation: DP by GMM (2001)
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