Portfolio Choice Over the Life-Cycle when the Stock and Labor Markets are Cointegrated

52 Pages Posted: 16 Jan 2006

See all articles by Luca Benzoni

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management; National Bureau of Economic Research (NBER)

Date Written: November 2007

Abstract

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

Benzoni, Luca and Collin-Dufresne, Pierre and Goldstein, Robert S., Portfolio Choice Over the Life-Cycle when the Stock and Labor Markets are Cointegrated (November 2007). FRB of Chicago Working Paper No. 2007-11. Available at SSRN: https://ssrn.com/abstract=875984 or http://dx.doi.org/10.2139/ssrn.875984

Luca Benzoni (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-8499 (Phone)

HOME PAGE: http://lbenzoni.frbchi.googlepages.com/

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Robert S. Goldstein

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
612-624-8581 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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