Life-Cycle Portfolio Choice with Imperfect Predictors

55 Pages Posted: 18 Sep 2019 Last revised: 10 Nov 2021

See all articles by Alexander Michaelides

Alexander Michaelides

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Yuxin Zhang

Renmin University of China

Date Written: November 9, 2021

Abstract

We study quantitatively how uncertainty in expected stock return predictability affects life-cycle portfolio choice and wealth accumulation in the presence of undiversifiable labor income risk. Households filter information about future expected returns from observed predictors and realized stock returns. Therefore, optimal portfolio choice does not only depend on financial wealth and age, as in more traditional life-cycle models. Counterfactuals demonstrate the magnitude of portfolio demand changes that depend on perceptions about underlying expected returns. On average, life-cycle asset allocation becomes more conservative than models with either i.i.d. stock returns, or clearer signals about expected stock returns.

Keywords: Portfolio Choice over the Life Cycle, Filtering, Stock Market Predictability, Imperfect Predictors.

JEL Classification: D15, G11, G5

Suggested Citation

Michaelides, Alexander and Zhang, Yuxin, Life-Cycle Portfolio Choice with Imperfect Predictors (November 9, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3450344 or http://dx.doi.org/10.2139/ssrn.3450344

Alexander Michaelides (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yuxin Zhang

Renmin University of China ( email )

Renmin University of China
Haidian District
Beijing, Beijing 100872
China

HOME PAGE: http://https://sites.google.com/view/yuxin-zhang/home

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