Abstract

https://ssrn.com/abstract=2744726
 


 



Predictors and Portfolios Over the Life Cycle: Skill vs. Luck


Holger Kraft


Goethe University Frankfurt

Claus Munk


Copenhagen Business School

Farina Weiss


Goethe University Frankfurt

February 6, 2017

Netspar Discussion Paper No. 01/2016-010

Abstract:     
In a calibrated consumption-portfolio model with stock, housing, and labor income predictability, we disentangle the welfare effects of skill and luck. Skilled investors are able to take advantage of all sources of predictability, whereas unskilled investors ignore predictability. Lucky investors enter the market at a favorable time. 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. 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.

Number of Pages in PDF File: 61

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

JEL Classification: G11, D91, D14


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Date posted: March 9, 2016 ; Last revised: February 6, 2017

Suggested Citation

Kraft, Holger and Munk, Claus and Weiss, Farina, Predictors and Portfolios Over the Life Cycle: Skill vs. Luck (February 6, 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

Contact Information

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
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