Optimal Volatility Timing: A Life-Cycle Perspective

25 Pages Posted: 22 Nov 2013 Last revised: 1 Jul 2017

See all articles by Jan Schneemeier

Jan Schneemeier

Michigan State University - Eli Broad College of Business

David Schreindorfer

Arizona State University

Date Written: November 21, 2013

Abstract

We study the role of time-varying stock return volatility in a consumption and portfolio choice problem for a life-cycle investor facing short-selling and borrowing constraints. Faced with a benchmark investment strategy that conditions on age and wealth only, we find that an investor is willing to pay a fee of up to 1%-1.5% of total life time consumption in order to optimally condition on volatility. Tilts in the optimal asset allocation in response to volatility shocks are considerably more pronounced than tilts in response to wealth shocks, and almost as important as life-cycle effects. Lastly, we find that the correlation between volatility and permanent labor income shocks may explain the low equity share of young households in the data.

Keywords: Stochastic volatility, portfolio choice, life-cycle investing

JEL Classification: G11

Suggested Citation

Schneemeier, Jan and Schreindorfer, David, Optimal Volatility Timing: A Life-Cycle Perspective (November 21, 2013). Available at SSRN: https://ssrn.com/abstract=2358130 or http://dx.doi.org/10.2139/ssrn.2358130

Jan Schneemeier (Contact Author)

Michigan State University - Eli Broad College of Business ( email )

632 Bogue St
East Lansing, MI 48824
United States

David Schreindorfer

Arizona State University ( email )

United States

HOME PAGE: http://www.davidschreindorfer.com

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