Optimal life-cycle portfolios for heterogeneous workers

Fabio Bagliano, Carolina Fugazza () and Giovanna Nicodano

No 266, Carlo Alberto Notebooks from Collegio Carlo Alberto

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'srisk 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 15-30% 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: 46 pages
Date: 2012, Revised 2013
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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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 (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:266

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