Book
Essays in optimal consumption and portfolio choice
Dissertation Abstracts International, ProQuest Information and Learning
2012
Abstract
The first chapter develops a lifecycle model to solve numerically for the optimal consumption and portfolio rules of households who face uninsurable labor income uncertainty, mortality risk, and borrowing constraints. I incorporate generalized utility forms (Epstein-Zin-Weil utility) and generalized stock return shock distribution (g-and-h distribution). The model generates plausible consumption, wealth accumulation and portfolio choice profiles. I also perform several sensitivity analyses to see the importance of our model parameters to the results. I show that the intertemporal elasticity of substitution (IES) parameter is an important factor when individuals make consumption decisions. An individual with low IES accumulates more wealth over the lifetime. Skewness and elongation, governed by g and h parameters respectively, are crucial when individuals make portfolio choices. An individual tend to invest less in risky assets when risky asset returns are negatively skewed and fat-tailed. Finally, I estimate the model parameters that allow the model results to match with empirical mean stock/bond ratio and median wealth/income ratio. I show that the flexibility of Epstein-Zin-Weil preferences and g-and-h stock return distribution allows us to bring the calibrated risk aversion down to lower than 4.
The second chapter examines how households should optimally consume and allocate their portfolio choices between stocks and bonds when we recognize that the Social Security benefit is progressive and wage indexed. The household decision rules are fundamentally altered. This chapter also investigates the welfare impacts of possible mistakes made by households in their financial planning process, including portfolio choices, retirement timing, and consumption and saving decisions. We find that retirement timing barely changes welfare at all, while portfolio choice mistakes decrease welfare moderately. On the other hand, consumption and saving mistakes lower welfare tremendously by as much as 14%. Our findings have important policy implications. Policy makers and financial planners should switch their focus from investment and retirement timing to getting households to consume right and save smartly.
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Details
- Title
- Essays in optimal consumption and portfolio choice
- Creators
- Jialun LiKent SmettersGregory NiniDaniel GottliebUniversity of Pennsylvania. Applied Economics
- Series
- Dissertation Abstracts International
- Publisher
- ProQuest Information and Learning; Ann Arbor, Mich
- Number of pages
- 1 online resource (124 pages).
- Resource Type
- Book
- Language
- English
- Academic Unit
- Finance
- Identifiers
- 1267712953; 9781267712950; 991021872799404721