Life-Cycle Consumption and Portfolio Choice with an Imperfect Predictor

Posted: 18 Nov 2016

See all articles by Yuxin Zhang

Yuxin Zhang

Renmin University of China

Date Written: November 17, 2016


I study the effect of observable predictors that imperfectly predict conditional expected stock returns on optimal life-cycle consumption and portfolio choice in the presence of undiversifiable labor income risk. Investors filter the unobservable expected stock returns from realized predictive variables and stock returns. Young stockholders hold more conservative portfolios, better matching empirical observations, than models assuming a predictor perfectly delivering the conditional expected stock return or models assuming i.i.d. stock returns. Welfare losses from ignoring imperfect predictability can be substantial.

Keywords: Portfolio Choice over the Life Cycle, Stock Market Mean Reversion, Filtering, Stock Market Predictability, Imperfect Predictor

JEL Classification: D14, G11, G17

Suggested Citation

Zhang, Yuxin, Life-Cycle Consumption and Portfolio Choice with an Imperfect Predictor (November 17, 2016). Available at SSRN: or

Yuxin Zhang (Contact Author)

Renmin University of China ( email )

Renmin University of China
Haidian District
Beijing, Beijing 100872

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