Life-Cycle Portfolio Choice with Imperfect Predictors

44 Pages Posted: 18 Sep 2019 Last revised: 11 Jan 2020

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: January 10, 2020


We study how imperfect predictors of stock returns affect life-cycle consumption and portfolio choice in the presence of undiversifiable labor income risk. Imperfect predictability forces investors to filter unobservable expected stock returns from realized predictive variables and stock returns and condition their decisions on the perceived conditional mean and variance of future stock returns. Recognizing the additional uncertainty from imperfect predictability, portfolios are more conservative than models with either perfect predictors or i.i.d. stock returns. The model therefore provides an explanation for why young stockholders hold conservative portfolios, and quantifies long run risks with imperfect stock market predictability.

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

JEL Classification: D15, G11, G5

Suggested Citation

Michaelides, Alexander and Zhang, Yuxin, Life-Cycle Portfolio Choice with Imperfect Predictors (January 10, 2020). Available at SSRN: or

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)

United Kingdom

Yuxin Zhang

Renmin University of China ( email )

Renmin University of China
Haidian District
Beijing, Beijing 100872

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