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Author: You Du
Publisher:
ISBN:
Category :
Languages : en
Pages : 97
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Book Description
This dissertation examines the effect of health and its associated variables on households' consumption and portfolio choices over life cycle. The first two essays constitute my job market paper, which explains why the risky portfolio share rises in wealth from two health mechanisms: endogenous health investment and medical expenditure risk. The third chapter explores the effect of health and health risk on households' optimal consumption and portfolio decisions over life cycle. Chapter 1 titled ``PORTFOLIO CHOICE AND HEALTH ACROSS WEALTH: EMPIRICAL EVIDENCE" illustrates the empirical relationship between the portfolio puzzle and the heterogeneity of health variables across wealth. Classic financial theory suggests that under the assumption of no borrowing constraints and no mean-reverting stock returns, households should hold a constant risky portfolio in spite of their wealth, ages and life horizons (Samuelson (1969) and Merton (1969, 1971)). Yet data from the Survey of Consumers Finances (SCF) show that the risky portfolio share of financial assets increases in wealth. In the literature, this is called the ``portfolio puzzle". Meanwhile, various sources of data indicate that, compared with the non-wealthy households, the wealthy people have better health, longer life horizon, higher out of pocket medical spending with lower uncertainty, and more health care time. All these facts suggest a novel correlation between the portfolio puzzle and the heterogeneity of health variables across wealth and provide a robust empirical foundation to explain the portfolio puzzle from a health perspective. In Chapter 2 titled ``A LIFE CYCLE MODEL OF PORTFOLIO CHOICE AND HEALTH", a life cycle model with endogenous health investment and medical expenditure risk is proposed to capture the key empirical features in the first chapter. This calibrated model remarkably matches the U.S. data. I find that endogenous health investment is essential to explain the portfolio puzzle: if health is exogenous without investment, the model can only could deliver 7.2% of the risky share gap across wealth. Medical expenditure risk is less important and has a larger effect on the non-wealthy group. If I abstract from medical expenditure risk, the risky shares increase for both groups: 24% for the low wealth group and 5% for the wealthy group. This life cycle model provides new insights into how health affects households' financial behavior. Chapter 3 titled ``OPTIMAL CONSUMPTION AND PORTFOLIO CHOICE WITH HEALTH RISK" investigates the effect of health and health risk on households' optimal consumption and portfolio allocations over the life cycle. The simulation results show that consumption, savings in bonds, and savings in stocks all increase with health. The risky portfolio share, which is the ratio of savings in stocks to the total financial assets, demonstrates the same tendency for both health states over the life cycle: at the very young age, the risky portfolio share is relatively high. Starting from the middle age, this share falls significantly and keeps steady until the end of life. For most of the lifetime, the risky portfolio share is positively related with health. These results emphasize the importance of health and its associated risk in consumption and portfolio decisions.
Author: You Du
Publisher:
ISBN:
Category :
Languages : en
Pages : 97
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Book Description
This dissertation examines the effect of health and its associated variables on households' consumption and portfolio choices over life cycle. The first two essays constitute my job market paper, which explains why the risky portfolio share rises in wealth from two health mechanisms: endogenous health investment and medical expenditure risk. The third chapter explores the effect of health and health risk on households' optimal consumption and portfolio decisions over life cycle. Chapter 1 titled ``PORTFOLIO CHOICE AND HEALTH ACROSS WEALTH: EMPIRICAL EVIDENCE" illustrates the empirical relationship between the portfolio puzzle and the heterogeneity of health variables across wealth. Classic financial theory suggests that under the assumption of no borrowing constraints and no mean-reverting stock returns, households should hold a constant risky portfolio in spite of their wealth, ages and life horizons (Samuelson (1969) and Merton (1969, 1971)). Yet data from the Survey of Consumers Finances (SCF) show that the risky portfolio share of financial assets increases in wealth. In the literature, this is called the ``portfolio puzzle". Meanwhile, various sources of data indicate that, compared with the non-wealthy households, the wealthy people have better health, longer life horizon, higher out of pocket medical spending with lower uncertainty, and more health care time. All these facts suggest a novel correlation between the portfolio puzzle and the heterogeneity of health variables across wealth and provide a robust empirical foundation to explain the portfolio puzzle from a health perspective. In Chapter 2 titled ``A LIFE CYCLE MODEL OF PORTFOLIO CHOICE AND HEALTH", a life cycle model with endogenous health investment and medical expenditure risk is proposed to capture the key empirical features in the first chapter. This calibrated model remarkably matches the U.S. data. I find that endogenous health investment is essential to explain the portfolio puzzle: if health is exogenous without investment, the model can only could deliver 7.2% of the risky share gap across wealth. Medical expenditure risk is less important and has a larger effect on the non-wealthy group. If I abstract from medical expenditure risk, the risky shares increase for both groups: 24% for the low wealth group and 5% for the wealthy group. This life cycle model provides new insights into how health affects households' financial behavior. Chapter 3 titled ``OPTIMAL CONSUMPTION AND PORTFOLIO CHOICE WITH HEALTH RISK" investigates the effect of health and health risk on households' optimal consumption and portfolio allocations over the life cycle. The simulation results show that consumption, savings in bonds, and savings in stocks all increase with health. The risky portfolio share, which is the ratio of savings in stocks to the total financial assets, demonstrates the same tendency for both health states over the life cycle: at the very young age, the risky portfolio share is relatively high. Starting from the middle age, this share falls significantly and keeps steady until the end of life. For most of the lifetime, the risky portfolio share is positively related with health. These results emphasize the importance of health and its associated risk in consumption and portfolio decisions.
Author: o F. Cocco
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
This article solves a realistically calibrated life cycle model of consumption and portfolio choice with non-tradable labor income and borrowing constraints. Since labor income substitutes for riskless asset holdings, the optimal share invested in equities is roughly decreasing over life. We compute a measure of the importance of human capital for investment behavior. We find that ignoring labor income generates large utility costs, while the cost of ignoring only its risk is an order of magnitude smaller, except when we allow for a disastrous labor income shock. Moreover, we study the implications of introducing endogenous borrowing constraints in this incomplete-markets setting.
Author: John Y. Campbell
Publisher: OUP Oxford
ISBN: 019160691X
Category : Business & Economics
Languages : en
Pages : 272
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Book Description
Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
Author: Francisco J. Gomes
Publisher:
ISBN:
Category : Asset allocation
Languages : en
Pages : 64
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Author: Luca Benzoni
Publisher:
ISBN:
Category : Investments
Languages : en
Pages : 49
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Book Description
Empirical evidence shows that changes in aggregate labor income and stock market returns exhibit only weak correlation at short horizons. As we document below, however, this correlation increases substantially at longer horizons, which provides at least suggestive evidence that stock returns and labor income are cointegrated. In this paper, we investigate the implications of such a cointegrated relation for life-cycle optimal portfolio and consumption decisions of an agent whose non-tradable labor income faces permanent and temporary idiosyncratic shocks. We find that, under economically plausible calibrations, the optimal portfolio choice for the young investor is to take a substantial ¿Xem short} position in the risky portfolio, in spite of the large risk premium associated with it. Intuitively, this occurs because the cointegration effect makes the present value of future labor income flows stock-like' for the young agent. However, for older agents who have shorter times-to-retirement, the cointegration effect does not have sufficient time to act, and the remaining human capital becomes more bond-like.' Together, these effects create a hump-shaped optimal portfolio decision for the agent over the life cycle, consistent with empirical observation
Author: João Francisco Cocco
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Author: Jean-Luc Vila
Publisher: Palala Press
ISBN: 9781342050984
Category :
Languages : en
Pages : 48
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Book Description
This work has been selected by scholars as being culturally important, and is part of the knowledge base of civilization as we know it. This work was reproduced from the original artifact, and remains as true to the original work as possible. Therefore, you will see the original copyright references, library stamps (as most of these works have been housed in our most important libraries around the world), and other notations in the work. This work is in the public domain in the United States of America, and possibly other nations. Within the United States, you may freely copy and distribute this work, as no entity (individual or corporate) has a copyright on the body of the work.As a reproduction of a historical artifact, this work may contain missing or blurred pages, poor pictures, errant marks, etc. Scholars believe, and we concur, that this work is important enough to be preserved, reproduced, and made generally available to the public. We appreciate your support of the preservation process, and thank you for being an important part of keeping this knowledge alive and relevant.
Author: Victor Duarte
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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We develop a machine-learning solution algorithm to solve for optimal portfolio choice in a detailed and quantitatively-accurate lifecycle model that includes many features of reality modelled only separately in previous work. We use the quantitative model to evaluate the consumption-equivalent welfare losses from using simple rules for portfolio allocation across stocks, bonds, and liquid accounts instead of the optimal portfolio choices. We find that the consumption-equivalent losses from using an age-dependent rule as embedded in current target-date/lifecycle funds (TDFs) are substantial, around 2 to 3 percent of consumption, despite the fact that TDF rules mimic average optimal behavior by age closely until shortly before retirement. Our model recommends higher average equity shares in the second half of life than the portfolio of the typical TDF, so that the typical TDF portfolio does not improve on investing an age-independent 2/3 share in equity. Finally, optimal equity shares have substantial heterogeneity, particularly by wealth level, state of the business cycle, and dividend-price ratio, implying substantial gains to further customization of advice or TDFs in these dimensions.
Author:
Publisher:
ISBN:
Category : Portfolio management
Languages : en
Pages : 31
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This paper derives optimal life cycle portfolio asset allocations as well as annuity purchases trajectories for a consumer who can select her hours of work and also her retirement age. Using a realistically-calibrated model with stochastic mortality and uncertain labor income, we extend the investment universe to include not only stocks and bonds, but also survival-contingent payout annuities. We show that making labor supply endogenous raises older peoples' equity share; substantially increases work effort by the young; and markedly enhances lifetime welfare. Also, introducing annuities leads to earlier retirement and higher participation by the elderly in financial markets. Finally, if we allow for an age-dependent leisure preference parameter, this fits well with observed evidence in that it generates lower work hours and smaller equity holdings at older ages as well as sensible retirement age patterns.
Author: Wei-Ting Pan
Publisher:
ISBN:
Category : Pensions
Languages : en
Pages : 296
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