Investing over the Life Cycle with Long-Run Labor Income Risk

28 Pages Posted: 24 Jul 2008 Last revised: 14 Jun 2009

See all articles by Luca Benzoni

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department

Olena Chyruk

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: June 11, 2009

Abstract

Many financial advisors and much of the academic literature often argue that young people should place most of their savings in stocks. In contrast, a significant fraction of U.S. households do not hold stocks. Moreover, life-cycle stock holdings are 'hump shaped:' Young investors typically hold very little in stocks, progressively increase their holdings as they age, and decrease their exposure to stock market risk when they approach retirement. In this article, we show how long-run labor income risk helps explain this evidence. Next, we discuss recent developments in the literature that has studied the effect of long-run labor income risk on the valuation of pension fund obligations, their funding, and the allocation of pension assets across different investment classes.

Keywords: Human Capital, Labor Income Risk, Long-Run Risk, Limited Stock Market Participation, Portfolio Choice, Life Cycle

JEL Classification: G11

Suggested Citation

Benzoni, Luca and Chyruk, Olena, Investing over the Life Cycle with Long-Run Labor Income Risk (June 11, 2009). Available at SSRN: https://ssrn.com/abstract=1172702 or http://dx.doi.org/10.2139/ssrn.1172702

Luca Benzoni (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-8499 (Phone)

HOME PAGE: http://lbenzoni.frbchi.googlepages.com/

Olena Chyruk

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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