Retirement Flexibility and Portfolio Choice in General Equilibrium
Erasmus University - Erasmus School of Economics; Eramus University Rotterdam (EUR) - Department of Economics
CPB Netherlands Bureau of Economic Policy Research
A. C. Meijdam
Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics
February 4, 2011
Tinbergen Institute Discussion Paper 11-038/DSF13
This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model of a closed economy. Retirement flexibility is often seen as a hedge against capital market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement flexibility is weakened – and under some conditions even turned around – if not only capital market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure.
Number of Pages in PDF File: 49
Keywords: portfolio choice, retirement (in)flexibility, productivity and depreciation risk, intratemporal substitution, general equilibrium
JEL Classification: E21, G11, J26working papers series
Date posted: February 21, 2011
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