Predictors and Portfolios Over the Life Cycle

SAFE Working Paper No. 139

63 Pages Posted: 1 Jun 2016 Last revised: 13 Jun 2018

See all articles by Holger Kraft

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: June 8, 2018

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.

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 (June 8, 2018). SAFE Working Paper No. 139. Available at SSRN: https://ssrn.com/abstract=2787568 or http://dx.doi.org/10.2139/ssrn.2787568

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

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

Claus Munk

Copenhagen Business School ( email )

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

HOME PAGE: http://sites.google.com/view/clausmunk/home

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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