Optimal Life-Cycle Portfolios for Heterogeneous Workers

38 Pages Posted: 7 Dec 2013

See all articles by Fabio C. Bagliano

Fabio C. Bagliano

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

Carolina Fugazza

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

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; EGCI; Netspar

Multiple version iconThere are 3 versions of this paper

Date Written: December 2, 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 degree of 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

JEL Classification: G11

Suggested Citation

Bagliano, Fabio C. and Fugazza, Carolina and Nicodano, Giovanna, Optimal Life-Cycle Portfolios for Heterogeneous Workers (December 2, 2013). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 260, Available at SSRN: https://ssrn.com/abstract=2364482 or http://dx.doi.org/10.2139/ssrn.2364482

Fabio C. Bagliano (Contact Author)

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Carolina Fugazza

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

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Milan, 20126
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Giovanna Nicodano

University of Turin - Department ESOMAS ( email )

Turin, 10134
Italy

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Collegio Carlo Alberto ( email )

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HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

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