Optimal Portfolio Choice for Early Retirement with Cointegration between the Stock and Labor Markets

61 Pages Posted: 16 Mar 2017 Last revised: 15 Nov 2017

See all articles by Min Dai

Min Dai

National University of Singapore (NUS) - Department of Mathematics

Shan Huang

National University of Singapore (NUS)

Seyoung Park

Loughborough University - School of Business and Economics

Date Written: March 14, 2017

Abstract

We present an optimal portfolio choice for retiring early when a borrowing and short sale constrained investor is facing cointegration between the stock and labor markets. With reasonable parameter values, there exists a target wealth-to-income ratio under which the investor does not participate in the stock market at all, whereas above which the investor increases the proportion of financial wealth invested in the stock market as she accumulates wealth. Contrary to common intuition, flexibility in determining the retirement timing allows the investor to invest less in the stock market than without retirement flexibility. Finally, the investor's willingness to retire earlier becomes stronger as risk aversion increases or as wages decline in the long term.

Keywords: Optimal Consumption, Optimal Investment, Retirement, Cointegration, Income Risks

JEL Classification: C61, E21, G11

Suggested Citation

Dai, Min and Huang, Shan and Park, Seyoung, Optimal Portfolio Choice for Early Retirement with Cointegration between the Stock and Labor Markets (March 14, 2017). Available at SSRN: https://ssrn.com/abstract=2932653 or http://dx.doi.org/10.2139/ssrn.2932653

Min Dai

National University of Singapore (NUS) - Department of Mathematics ( email )

Singapore

Shan Huang

National University of Singapore (NUS) ( email )

13 Computing Drive
Singapore, 117417
Singapore

Seyoung Park (Contact Author)

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

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