Time Variation in Life Expectancy, Optimal Portfolio Choice and the Cross-Section of Asset Returns

44 Pages Posted: 26 Jan 2010 Last revised: 30 Dec 2015

Thomas Andreas Maurer

Washington University in St. Louis - John M. Olin Business School; London School of Economics & Political Science (LSE)

Date Written: December 1, 2015

Abstract

I solve a portfolio optimization problem with stochastic death rates. An agent demands more of an asset that pays off high (low) in states of the world when he expects to live longer (shorter) than an asset with the opposite payoff. Consequently, in equilibrium, an asset with a positive correlation between its returns and changes in the life expectancy pays a lower expected return than an asset with a negative correlation. Empirical evidence supports the model. Out-of-sample evidence suggests that a trading strategy, which exploits the theoretical relationship, pays 3.25% annual unexplained returns according to the CAPM.

Keywords: uncertain life expectancy, uncertain lifetime, portfolio optimization under uncertainty, time variation in life expectancy, stochastically changing mortality rates, demographic change, intertemporal consumption choice, annuity, life cycle consumption, capital asset pricing, cross-section of returns

JEL Classification: G11, G12, D91

Suggested Citation

Maurer, Thomas Andreas, Time Variation in Life Expectancy, Optimal Portfolio Choice and the Cross-Section of Asset Returns (December 1, 2015). Available at SSRN: https://ssrn.com/abstract=1542664 or http://dx.doi.org/10.2139/ssrn.1542664

Thomas Andreas Maurer (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
149
rank
179,745
Abstract Views
827
PlumX