Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk write by Valery Polkovnichenko. This book was released on 2005. Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk available in PDF, EPUB and Kindle. This paper explores the implications of the additive and endogenous habit formation preferences in the context of a life-cycle model of an investor who has stochastic uninsurable labor income. To solve the model, I analytically derive the habit - wealth feasibility constraints and show that they depend on the worst possible path of future labor income and on the habit strength, but not on the probability of the worst income. When there is only a slim chance of a severe income shock, the model implies much more conservative portfolios. The model also predicts that for some low to moderately wealthy households, the portfolio share allocated to stocks increases with wealth. Because of this feature, the model can generate more conservative portfolios for younger than for middle-aged households. One controversial finding is that for high values of the habit strength parameter, usually required for the resolution of asset pricing puzzles in general equilibrium, the life-cycle model predicts counterfactually high wealth accumulation.
Portfolio Choice with Internal Habit Formation
Portfolio Choice with Internal Habit Formation - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Portfolio Choice with Internal Habit Formation write by Francisco J. Gomes. This book was released on 2003. Portfolio Choice with Internal Habit Formation available in PDF, EPUB and Kindle.
Portfolio Choice with Internal Habit Formation
Portfolio Choice with Internal Habit Formation - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Portfolio Choice with Internal Habit Formation write by Francisco Gomes. This book was released on 2008. Portfolio Choice with Internal Habit Formation available in PDF, EPUB and Kindle. Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In contrast to the initial motivation, we find that the model is not able to simultaneously match two very important stylized facts: A low stock market participation rate, and moderate equity holdings for those households that do invest in stocks. Habit formation increases wealth accumulation because the intertemporal consumption smoothing motive is stronger. As a result, households start participating in the stock market very early in life, and invest their portfolios almost fully in stocks. Therefore, we conclude that, with respect to its ability to match the empirical evidence on asset allocation behavior, the internal habit formation model is dominated by its time-separable utility counterpart.
Time Non-separable Utility in Life-cycle Consumption and Portfolio Choice
Time Non-separable Utility in Life-cycle Consumption and Portfolio Choice - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Time Non-separable Utility in Life-cycle Consumption and Portfolio Choice write by Joseph P. Lupton. This book was released on 2002. Time Non-separable Utility in Life-cycle Consumption and Portfolio Choice available in PDF, EPUB and Kindle.
Habit Formation and Lifetime Portfolio Selection
Habit Formation and Lifetime Portfolio Selection - read free eBook in online reader or directly download on the web page. Select files or add your book in reader. Download and read online ebook Habit Formation and Lifetime Portfolio Selection write by Yoel Lax. This book was released on 2001. Habit Formation and Lifetime Portfolio Selection available in PDF, EPUB and Kindle. A life cycle model in which an investor (a) faces i.i.d. asset returns, (b) receives no non-asset income, and (c) has an iso-elastic period utility function, predicts that the investor will allocate a constant fraction of his wealth to risky securities over his lifetime. This result is at odds with both economic intuition and the empirical evidence on asset allocation of individuals. In this work we investigate the effect that habit formation has on life cycle portfolio allocation. This amounts to relaxing assumption (c) by making period utility dependent on past consumption. We derive the optimal consumption and investment policies for a finitely-lived investor in discrete time and find that habit formation can explain increasingly conservative as well as hump-shaped investment patterns over the life cycle, both of which have been documented empirically. The crucial element determining which pattern obtains is the initial habit of a young investor. Furthermore we find that habit formation induces much stronger life cycle effects than those obtained by relaxing either assumptions (a) or (b): Return predictability is of negligible importance in a habit formation model, and labor income alone cannot generate hump-shaped investment patterns. Next we show that our basic results are robust to whether habit formation is introduced into the utility function as a difference or ratio, and to whether the habit stock consists of only one lag or a distributed lag of consumption. In contrast, the endogeneity of habit is crucial to our results--a model with a constant subsistence level, which is nested in our more general model, cannot produce the same life cycle investment patterns. Finally, we show that a continuous-time version of our habit model yields qualitatively different results.
