Mass Customization in Life-Cycle Investing Strategies with Income Risk

Romain Deguest, Lionel Martellini and Vincent Milhau
Additional contact information
Romain Deguest: EDHEC-Risk Institute
Lionel Martellini: EDHEC Business School, EDHEC Risk Institute, ERI Scientific Beta
Vincent Milhau: EDHEC-Risk Institute

Bankers, Markets & Investors, 2015, issue 139, 28-44

Abstract: Formal intertemporal portfolio selection models show that the utility maximizing strategy for an individual investor depends on a number of subjective characteristics such as the investor’s horizon, risk aversion and non-financial income, in addition to depending on market conditions. These insights are vastly ignored by current forms of target date fund products, which most often propose a deterministic decrease in the equity allocation regardless of market conditions, and ignore the question of labor income risk. This paper shows that, in spite of a high degree of heterogeneity in individual investors’ income streams, grouping investors with similar income profiles, and implementing a unique investment strategy for all members of a given class, involves only a limited welfare cost with respect to an idealized fully customized strategy. Our results also suggest that these strategies consistent with mass-customization constraints strongly dominate allocation strategies that completely ignore the presence of income risk.

Keywords: Human Capital; Income Risk; Optimal Portfolio (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.revue-banque.fr/article/mass-customizat ... investing-strategies (text/html)
price

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rbq:journl:i:139:p:28-44

Ordering information: This journal article can be ordered from
12 rue du Quatre-Septembre, 75002 PARIS France
http://www.eska.fr

Access Statistics for this article

More articles in Bankers, Markets & Investors from ESKA Publishing
Bibliographic data for series maintained by Marise Urbano ().