How Does Consumption Habit Affect the Household's Demand for Life-Contingent Claims?

45 Pages Posted: 31 Jul 2018

See all articles by Ken Seng Tan

Ken Seng Tan

University of Waterloo

Pengyu Wei

University of Waterloo - Department of Statistics and Actuarial Science; University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR); University of Oxford - Oxford-Man Institute of Quantitative Finance

Sheng Chao Zhuang

University of Nebraska Lincoln

Date Written: July 10, 2018

Abstract

This paper examines the impact of habit formation on demand for life-contingent claims in a life-cycle model. We solve the optimal consumption, portfolio choice, and life insurance/annuity problem analytically, and illustrate the mechanism how consumption habit can alter the bequest motive and therefore drive the demand for life-contingent products. We show that habit formation alone can partially address the mismatch in the life insurance market between the life insurance holdings of most households and their underlying financial vulnerabilities, or the mismatch in the annuity market between the lack of any annuitization and the risk of outliving their financial wealth, but not both. However, habit formation together with social security may shed some light on the puzzling thinness of both life insurance and voluntary annuity market.

Suggested Citation

Tan, Ken Seng and Wei, Pengyu and Zhuang, Sheng Chao, How Does Consumption Habit Affect the Household's Demand for Life-Contingent Claims? (July 10, 2018). Available at SSRN: https://ssrn.com/abstract=3211009 or http://dx.doi.org/10.2139/ssrn.3211009

Ken Seng Tan

University of Waterloo ( email )

Waterloo, Ontario N2L 3G1
Canada

Pengyu Wei (Contact Author)

University of Waterloo - Department of Statistics and Actuarial Science ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6, Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

University of Oxford, Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

Sheng Chao Zhuang

University of Nebraska Lincoln ( email )

Lincoln, NE 68588
United States
4024722330 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
63
Abstract Views
488
rank
426,745
PlumX Metrics