Optimal portfolio choice with asset return predictability and nontradable labor income

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• 作者：Hui-Ju Tsai ; Yangru Wu
• 关键词：Portfolio choice ; Return predictability ; Nontradable labor income ; Life cycle ; G11 ; G12
• 刊名：Review of Quantitative Finance and Accounting
• 出版年：2015
• 出版时间：July 2015
• 年：2015
• 卷：45
• 期：1
• 页码：215-249
• 全文大小：563 KB
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• 作者单位：Hui-Ju Tsai (1)
  Yangru Wu (2) (3)
  
  1. Washington College, 300 Washington Avenue, Chestertown, MD, 21620, USA
  2. Rutgers Business School, Rutgers University, Newark, NJ, 07102, USA
  3. Chinese Academy of Finance and Development, Central University of Finance and Economics, Beijing, China
  
• 刊物类别：Business and Economics
• 刊物主题：Economics
  Finance and Banking
  Accounting and Auditing
  Econometrics
  Operation Research and Decision Theory
  
• 出版者：Springer Netherlands
• ISSN：1573-7179

文摘

We study the optimal consumption and investment choice for long-horizon investors with nontradable labor income and time-varying investment opportunities. Our results suggest that the popular investment recommendation that more conservative investors should hold a higher bond/stock ratio may lack theoretical justification when labor income is considered. When labor income is positively correlated with stock returns, a more risk-averse investor holds a higher bond/stock ratio in her risky portfolio, but the reverse is true when labor income is positively correlated with bond returns. The allocation to stock inherits the inverted U-shaped pattern of labor income growth with respect to expected time until retirement. Investors with lower income growth, namely, younger workers or those near retirement, should invest less in risky assets than those who are in their mid career and have a higher income growth. Performance test shows that the welfare loss of ignoring asset return predictability in the presence of nontradable labor income can be economically significant.