Labor income dynamics at business-cycle frequencies: Implications for portfolio choice

Anthony W. Lynch and Sinan Tan

Journal of Financial Economics, 2011, vol. 101, issue 2, 333-359

Abstract: Young agents with low wealth-income ratios counter factually hold more stock than young, rich agents and old agents using the standard portfolio choice model with i.i.d. stock returns and labor income. This paper matches the countercyclical volatility and procyclical mean of U.S. labor income and finds that, consistent with U.S. data, young, poor agents now hold less stock than both young, rich agents and old agents, and no stock a large fraction of the time. Our results suggest that the predictability of labor income growth at a business-cycle frequency, particularly the countercyclical variation in volatility, plays an important role in a young agent's decision making about her portfolio's stock holding.

Keywords: Dynamic; portfolio; choice; Labor; income; Life; cycle; Stock; allocation; Stock; market; participation (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (47)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:101:y:2011:i:2:p:333-359

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