Download this Paper Open PDF in Browser

Optimal Life-Cycle Portfolios for Heterogeneous Workers

46 Pages Posted: 19 Aug 2013  

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics; Center for Research on Pensions and Welfare Policies (CeRP); University of Torino - Collegio Carlo Alberto

Carolina Fugazza

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Giovanna Nicodano

University of Turin - Department of Economics and Statistics; Collegio Carlo Alberto

Multiple version iconThere are 3 versions of this paper

Date Written: June 28, 2013

Abstract

Household portfolios include risky bonds, beyond stocks, and respond to permanent labour income shocks. This paper brings these features into a life-cycle setting, and shows that optimal stock investment is constant or increasing in age before retirement for realistic parameter combinations. The driver of such inversion in the life-cycle profile is the resolution of uncertainty regarding social security pension, which increases the investor’s risk appetite. This occurs if a small positive contemporaneous correlation between permanent labour income shocks and stock returns is matched by a realistically high variance of such shocks and/or risk aversion. Absent this combination, the typical downward sloping profile obtains. Overlooking differences in optimal investment profiles across heterogeneous workers results in large welfare losses, in the order of 15-30% of lifetime consumption.

Keywords: Life-cycle portfolio choice, background risk, age rule, investor heterogeneity, stock market participation

Suggested Citation

Bagliano, Fabio C. and Fugazza, Carolina and Nicodano, Giovanna, Optimal Life-Cycle Portfolios for Heterogeneous Workers (June 28, 2013). Netspar Discussion Paper No. 06/2013-025. Available at SSRN: https://ssrn.com/abstract=2312507 or http://dx.doi.org/10.2139/ssrn.2312507

Fabio Bagliano

University of Turin - Department of Economics and Statistics ( email )

C. so Unione Sovietica, 218 Bis
Torino, I-10134
Italy
+39 011 670 6084 (Phone)
+39 011 670 6062 (Fax)

HOME PAGE: http://web.econ.unito.it/bagliano

Center for Research on Pensions and Welfare Policies (CeRP) ( email )

Via Real Collegio, 30
Moncalieri, Turin 10024
Italy

University of Torino - Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

Carolina Fugazza

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Giovanna Nicodano (Contact Author)

University of Turin - Department of Economics and Statistics ( email )

Turin, 10134
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/nicodano/

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy
390116705006 (Phone)

HOME PAGE: http://www.carloalberto.org/people/nicodano/

Paper statistics

Downloads
54
Rank
279,445
Abstract Views
361