Download this Paper Open PDF in Browser

Predictors and Portfolios Over the Life Cycle

61 Pages Posted: 9 Mar 2016 Last revised: 5 Jul 2017

Holger Kraft

Goethe University Frankfurt

Claus Munk

Copenhagen Business School

Farina Weiss

Goethe University Frankfurt

Multiple version iconThere are 2 versions of this paper

Date Written: July 5, 2017

Abstract

In a calibrated consumption-portfolio model with stock, housing, and labor income predictability, we evaluate the welfare effects of predictability on life-cycle consumption-portfolio choice. We compare skilled investors who are able to take advantage of all sources of predictability with unskilled investors ignoring predictability. For an unskilled investor the certainty equivalent of wealth is 0.3-6.8% lower than for a skilled investor, depending on the market entry date. We also determine the effect of luck to enter the market at a favorable time. Across market entry dates, skilled but unlucky investors can lose up to 15.4% compared to unskilled but lucky investors. Simulation studies confirm the relative importance of luck and document that, if anything, housing predictability is more important than stock predictability.

Keywords: Return predictability, scenarios, welfare, performance, housing

JEL Classification: G11, D91, D14

Suggested Citation

Kraft, Holger and Munk, Claus and Weiss, Farina, Predictors and Portfolios Over the Life Cycle (July 5, 2017). Netspar Discussion Paper No. 01/2016-010. Available at SSRN: https://ssrn.com/abstract=2744726 or http://dx.doi.org/10.2139/ssrn.2744726

Holger Kraft

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Claus Munk (Contact Author)

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/site/munkfinance/

Farina Weiss

Goethe University Frankfurt ( email )

Faculty of Economics and Business Administration
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Paper statistics

Downloads
144
Rank
104,673
Abstract Views
670