Time Diversification in Pension Savings
35 Pages Posted: 24 Feb 2006
Date Written: February 15, 2006
We take a closer look at how investment horizon affects risk taking, often referred to as the time-diversification controversy. We use data on individuals' choices in the Swedish pension system. Theoretically, if returns are serially uncorrelated, investors do not have human capital, and investors have constant relative risk aversion then investment horizon should not influence asset allocation. This theory causes some academics to explain the positive correlation between investment horizon and risk exposure by generational differences in human capital, not the investment horizon per se. Our empirical analysis shows that portfolio risk significantly declines with age in a statistical context. This behavior is still evident after controlling for alternative explanations related to human capital and difficult to reject in an economic context.
Keywords: Pension Savings, Asset allocation
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