Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model

A stochastic programming approach for multi-period portfolio optimization

“…These results can be explained by the hedging effect associated with the certain stream of income. The decreasing share of stocks with increasing age is consistent with the results in Bodie et al (1992) (we have replicated their results to the extent possible given the differences in the two settings). They consider cases where initial labor income is about 10-30% of initial wealth, and their results are also characterized by extreme short positions in the risk-free asset.…”

“…In all cases, however, the asset allocation remains rather unaffected by changing the age of the investor. Bodie et al (1992) and Chen et al (2006) find a significant impact of human capital on asset allocation decisions over the life cycle. We therefore also investigate the importance of labor income on the age dependence of asset allocation decisions.…”

“…Many papers try to extend the classic Merton framework along different lines while maintaining analytical solutions (see, e.g., Bodie et al 1992;Balvers and Mitchell 1997;Kim and Omberg 1996;Wachter 2002;Liu 2007). Analytical solutions are available for restrictive assumptions on the utility structure and the planning horizon.…”

Dollar Cost Averaging

“…10 This age dependent allocation rule conflicts with early analytic models of dynamic investment planning such as that developed by Samuelson (1969) which prescribe that, at least for standard iso-elastic utility functions, the optimal equity allocation is age independent. 11 However, more sophisticated analytic models such as Bodie et al (1992) and Cocco et al (2005), which take account of the depreciating endowment of human capital, tend to validate the principles, if not the parameters, of the heuristic age dependent rule. For example, Cocco et al (ibid.…”

Optimal asset allocation for pension funds under mortality risk during the accumulation and decumulation phases

“…In our approach, instead, we treat u as a planned flow which the fund manager can rely on. Furthermore, as both Merton (1990, Section 5.7) and Bodie, Merton, and Samuelson (1992) underline, it is not necessary that the new financial flows (u) can be borrowed against, since the investor behaves "as if" this were true.…”