Portfolio Choice Over the Life-Cycle when the Stock and Labor Markets are Cointegrated
52 Pages Posted: 16 Jan 2006
Date Written: November 2007
We study portfolio choice when labor income and dividends are cointegrated. Economically plausible calibrations suggest young investors should take substantial short positions in the stock market. Because of cointegration the young agent's human capital electively becomes stock-like. However, for older agents with shorter times - to - retirement, cointegration does not have sufficient time to act, and thus their human capital becomes more bond-like. Together, these exects create hump - shaped life - cycle portfolio holdings, consistent with empirical observation. These results hold even when asset return predictability is accounted for.
Keywords: Human Capital, Risky Labor Income, Limited Stock Market Participation, Portfolio Choice, Life Cycle
JEL Classification: G11
Suggested Citation: Suggested Citation