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Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model
Zvi Bodie,Robert C. Merton,Robert C. Merton,Robert C. Merton,William Samuelson,William Samuelson +5 more
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In this paper, the authors examine the effect of the labor-leisure choice on portfolio and consumption decisions over an individual's life cycle and show that labor and investment choices are intimately related.Abstract:
This paper examines the effect of the labor-leisure choice on portfolio and consumption decisions over an individual's life cycle. The model incorporates the fact that individuals may have considerable flexibility in varying their work effort (including their choice of when to retire). Given this flexibility, the individual simultaneously determines optimal levels of current consumption, labor effort, and an optimal financial investment strategy at each point in his life cycle. We show that labor and investment choices are intimately related. The ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante. The model explains why the young (enjoying greater labor flexibility over their working lives) may take greater investment risks than the old. It also offers an explanation as to why consumption spending is relatively "smooth" despite volatility in asset prices. Finally, the paper provides a compact method for valuing the risky cash flows associated with future wage income.read more
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Consumption and Portfolio Choice over the Life Cycle
TL;DR: In this article, a realistically calibrated life cycle model of consumption and portfolio choice with non-tradable labor income and borrowing constraints is proposed, and the optimal share invested in equities is roughly decreasing over life.
Journal ArticleDOI
Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk
John Heaton,Deborah Lucas +1 more
TL;DR: In this paper, the authors show that entrepreneurial income risk has a significant impact on portfolio choice and asset prices, and they find that households with high and variable business income hold less wealth in stocks than other similarly wealthy households, although they constitute a significant fraction of the stockholding population.
Journal ArticleDOI
Portfolio Choice in the Presence of Housing
Joao F. Cocco,Joao F. Cocco +1 more
TL;DR: In this paper, investment in housing plays a crucial role in explaining the patterns of cross sectional variation in the composition of wealth and the level of stockholdings observed in portfolio composition data.
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Portfolio Choice and Trading in a Large 401(k) Plan
TL;DR: The authors studied nearly 7,000 retirement accounts during the April 1994-August 1998 period and found that most asset allocations are extreme (either 100 percent or zero percent in equities) and there is inertia in asset allocations.
Posted Content
How Do Household Portfolio Shares Vary with Age
TL;DR: In this article, the authors examined the relationship between age and portfolio choice, focusing on the observed relationship between the age and the fraction of wealth held in the stock market, and found that equity ownership has a hump-shape pattern with age, while equity shares conditional on ownership are nearly constant across age groups.
References
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An intertemporal capital asset pricing model
TL;DR: In this article, an intertemporal model for the capital market is deduced from portfolio selection behavior by an arbitrary number of investors who aot so as to maximize the expected utility of lifetime consumption and who can trade continuously in time.
Journal ArticleDOI
Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case
TL;DR: In this paper, the combined problem of optimal portfolio selection and consumption rules for an individual in a continuous-time model was examined, where his income is generated by returns on assets and these returns or instantaneous "growth rates" are stochastic.
Journal ArticleDOI
An intertemporal asset pricing model with stochastic consumption and investment opportunities
TL;DR: In this paper, the authors derived a single-beta asset pricing model in a multi-good, continuous-time model with uncertain consumption-goods prices and uncertain investment opportunities.
Book ChapterDOI
Optimum Consumption and Portfolio Rules in a Continuous-Time Model*
TL;DR: In this paper, the authors considered the continuous-time consumption-portfolio problem for an individual whose income is generated by capital gains on investments in assets with prices assumed to satisfy the geometric Brownian motion hypothesis, which implies that asset prices are stationary and lognormally distributed.
Book ChapterDOI
Lifetime Portfolio Selection By Dynamic Stochastic Programming
TL;DR: In this paper, the optimal consumption-investment problem for an investor whose utility for consumption over time is a discounted sum of single-period utilities, with the latter being constant over time and exhibiting constant relative risk aversion (power-law functions or logarithmic functions), is discussed.