Optimal Consumption and Portfolio Choice For Long-Horizon Investors with Nontradable Labor Income When Asset Returns are Predictable

49 Pages Posted: 1 Oct 2011 Last revised: 22 Feb 2012

See all articles by Hui-Ju Tsai

Hui-Ju Tsai

Washington College - Department of Business Management

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Date Written: September 7, 2011

Abstract

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. The allocation to stock inherits the inverted U-shaped pattern of labor income growth with respect to expected time until retirement. Performance test shows the welfare loss of ignoring asset return predictability in the presence of nontradable labor income can be economically significant.

Keywords: portfolio choice, consumption, predictability, labor income

JEL Classification: G11, G12

Suggested Citation

Tsai, Hui-Ju and Wu, Yangru, Optimal Consumption and Portfolio Choice For Long-Horizon Investors with Nontradable Labor Income When Asset Returns are Predictable (September 7, 2011). Available at SSRN: https://ssrn.com/abstract=1923784 or http://dx.doi.org/10.2139/ssrn.1923784

Hui-Ju Tsai (Contact Author)

Washington College - Department of Business Management ( email )

300 Washington Avenue
Chestertown, MD 21620
United States

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

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