Three Essays on Consumption, Portfolio Choice and Retirement Accounts PDF Download

Author: Pu Li
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 113

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Author: Ehud Peleg
Publisher: ProQuest
ISBN:
Category : Capital assets pricing model
Languages : en
Pages : 356

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Author: Tae-Young Pak
Publisher:
ISBN:
Category :
Languages : en
Pages : 302

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This dissertation considers household portfolio choice at the end of life-cycle. Three essays examine the importance of uncertainty about medical expenditure risk, cognitive aging, and subjective life horizon, and their role in explaining late-life savings decisions and portfolio allocation. Chapter 2 of the dissertation, entitled "Medical expenditure risk and precautionary saving: Evidence from Medicare Part D", tests the presence of precautionary saving motive to cope with medical expenditure risk. By examining Medicare Part D and it's association with household saving, I demonstrate that social insurance programs discourage private saving by reducing health-related uncertainty. Chapter 3 of the dissertation, entitled "Econometric analysis of cognitive abilities and portfolio choice", explores the role of cognitive aging in explaining a portfolio rebalancing towards safer assets at the end of life-cycle. In this essay, I argue that a gradual decrease in risky asset ownership at the end of life-cycle is in part driven by losing cognitive capabilities. I pay particular attention to testing whether such association is observed only on the extensive margin - that is, changes in ownership, or both risky asset ownership and reallocation across the intensive margin are affected. Causality is tested by exploiting exogenous variation in cognitive health, created by the introduction of Medicare Part D in 2006. Chapter 4 of the dissertation, entitled "Subjective life expectancy and portfolio choice: A household bargaining approach", examines collective decision-making when spouses have an incentive to bargain over portfolio allocation. This article starts with two well-known facts: (a) difference in life expectancy between husband and wife; and (b) age disparity in marriage. These two facts imply that females, on average, face 5 or 6 years longer retirement period to finance, and thus have more incentive to hold risky assets to achieve higher expected capital gains in the long-term. A difference in life expectancy then creates an incentive to bargain over how to allocate savings to risky and non-risky assets. The estimation results indeed show that more financial wealth is allocated to risky assets when a spouse with longer life expectancy has the "final say."

Author: Jialun Li
Publisher:
ISBN:
Category :
Languages : en
Pages : 114

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Author: Yang Su
Publisher:
ISBN:
Category :
Languages : en
Pages : 114

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Book Description
With high-quality household level asset holding data becoming available as well as the exponential increase in computing power, there is a growing literature that studies how households make investment decisions facing various types of uninsurable background risks. In this dissertation, I build theoretical models and conduct empirical studies to investigate different problems on household asset allocation. In chapter 1, I build a life-cycle model of portfolio choice with endogenous labor supply and a fixed cost of labor market participation to incorporate both the extensive and intensive mar- gins of labor supply decisions. I show that the risky asset holdings of young agents (agents younger than 45-year-old) are lower when compared to a model that only incorporates the intensive margin of labor supply. The risky asset holdings of young agents are further reduced and become hump-shaped when two additional features are included to the model: 1) endogenous Social Security accumulation and 2) a small possibility of a zero-income state. These two features increase the uncertainties faced by the agents while the fixed cost of labor market participation reduces the agents's ability to use labor supply to buffer against future income uncertainties. My model therefore reduces the gap between the empirical observations on household risky asset holdings and the predictions made by life-cycle models with endogenous labor supply. In chapter 2, we build a three-period model to study asset allocation ("how much to invest") and location ("which account to use") consequences when an economic agent has internal habit formation utility and has access to both an illiquid but tax-favored retirement account and a taxable personal account. We show that the incentive to maintain high consumption relative to the habit level and the restriction of only having access to the personal account before retirement induces the agent to hold a safer portfolio in her personal account and a riskier portfolio in her retirement account, in accordance with empirical findings on retirement asset allocation. We also show that retirement asset allocation and location decisions are affected by bequest motives and employer match, providing policy implications for retirement plan designers. In chapter 3, I provide updated estimations of the age profiles of stock market participation and risky share in the United States using data from the Panel Study of Income Dynamics (PSID). This chapter is motivated by the recent findings of Fagereng, Gottlieb, and Guiso (2017) on Norwegian data that the age profiles of stock market participation rate and risky share become closer to theoretical predictions when they employ more precise empirical strategies to identify the age, cohort and year effects, control for demographic variables and use a Heckman selection model to control for the endogeneity of stock market participation decision. I apply the same empirical strategies in Fagereng et al. (2017) on the U.S. data. I find that the age profile of stock market participation rate is increasing over the life cycle instead of hump-shaped. The estimated conditional risky share, after controlling for selection, is higher than the risky shares reported in previous papers and it is slightly increasing over the life cycle.

Author: John Y. Campbell
Publisher: OUP Oxford
ISBN: 019160691X
Category : Business & Economics
Languages : en
Pages : 272

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Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.

Author: Lorenz S. Schendel
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Author: Stavros Panageas
Publisher:
ISBN:
Category :
Languages : en
Pages : 256

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In the first chapter I investigate whether firms' physical investments react to the speculative over-pricing of their securities. I introduce investment considerations in an infinite horizon continuous time model with short sale constraints and heterogeneous beliefs along the lines of Scheinkman and Xiong (2003) and obtain closed form solutions for all quantities involved. I show that market based q and investment are increased, even though such investment is not warranted on the basis of long run value maximization. I use a simple episode to test the hypothesis that investment reacts to over-pricing. With publicly available data on short sales during the 1920's, I examine both the price reaction and the investment behavior of a number of companies that were introduced into the "loan crowd" during the first half of 1926. In line with Jones and Lamont (2002), I interpret this as evidence of overpricing due to speculation. I find that investment by these companies follows both the increase and the decline in "q" before and after the introduction, suggesting that companies in this sample reacted to security over-pricing. In the next chapter of the thesis (co-authored with E. Farhi) we study optimal consumption and portfolio choice in a framework where investors save for early retirement. We assume that agents can adjust their labor supply only through an irreversible choice of their retirement time. We obtain closed form solutions and analyze the joint behavior of retirement time, portfolio choice, and consumption. In the final chapter of the thesis (co-authored with R. Caballero) we turn attention to hedging of sudden stops. We observe that even well managed emerging market economies are exposed to significant external risk, the bulk of which is financial. We focus on the optimal financial policy of such an economy under different imperfections and degrees of crowding out in its hedging opportunities.

Author: Saku P. Aura
Publisher:
ISBN:
Category :
Languages : en
Pages : 182

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The first essay of this thesis studies within-family decision making regarding investment in income protection for surviving spouses using a simple and tractable Nash-bargaining model. A change in US pension law (the Retirement Equity Act of 1984) is used as an instrument to derive predictions from the bargaining model and to contrast these with the predictions of the classical single-utility-function model of the household. In the empirical part of the essay, the predictions of the classical model are rejected in favor of the predictions of the Nash-bargaining model. Second essay studies married couple's dynamic investment and consumption choices under the assumption that the couple cannot commit across time to not to renegotiate their decisions. The inefficiencies that can arise are characterized. Efficiency properties of different divorce asset division regimes are examined. The effect of inability to commit across time on the savings level is examined under a tractable special case of the model. Third essay is coauthored with Professor Peter Diamond and Professor John Geanakoplos. In this essay we extend Arrow's analysis of portfolio choice in a one-period model to savings and portfolio choice in a two-period model.

Author: Yingtong Xie
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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In recent decades, households in the US have been facing greater uncertainty in retirement wealth from their employment-based pension plans, as employers move from offering defined-benefit (DB) pensions to defined-contribution (DC) pensions. In Chapter 1, I quantify the extent to which this shift in workplace pension plans affects households' portfolio choices and their risk exposure. Using a life cycle model with two pension plans, stochastic risky asset returns, idiosyncratic earnings shock, and endogenous labor supply, I find that households' risk exposure increases from 3.2% to 6.7% in the DC pension dominant environment while the weight of risky assets in households' portfolio doubles. Compare to DB pensions, DC pensions result in less wealth inequality and higher consumption during retirement absent adverse shocks, but it comes with welfare loss for younger households and old retirees, which illustrates the need of designing possible age-dependent pension policies. When hit by adverse shocks of the same magnitude, households with DC pensions experience 4.3 percentage point larger drop in consumption and take longer to recover, which increases the likelihood of a severe consumption driven recession.In Chapter 2, we propose a methodology for measuring the size and properties of the shadow economy. We use a two-sector dynamic deterministic general equilibrium model with four different trends: hours worked, investment-specific productivity, formal productivity, and shadow productivity. We find that the shadow productivity trend is endogenous, in the sense that it is an exact function of model parameters and the other three trends. We also document that, in order to be consistent with observed (real-world) trend growths, the shadow sector needs to exhibit increasing returns to scale, which is contrary to the standard procedure of imposing decreasing returns to this sector. We apply our methodology to a set of seven Latin American and Asian countries and document several empirical regularities that emerge from our analysis, the most important one being that the volatility of shadow sector output is considerably larger than the one in formal sector output. In Chapter 3, I look at the welfare implications of two federal student loan repayment plans. Specifically, I study how the addition of the newest income-driven repayment plan called Revised-Pay-As-You-Earn, or REPAYE, could affect undergraduate student loan borrowers under the Federal Student Loan Program. I build a dynamic model with stochastic earnings shocks to quantify welfare and wealth distribution implications of the inclusion of REPAYE. Unlike existing works on student loans, I allow agents to switch between Standard and REPAYE plans once during their repayment periods. My results show that adding REPAYE could potentially lead to less wealth inequality across the economy but not so much when including the option of switching between plans. My paper also demonstrates that for undergraduate borrowers, including REPAYE without the possibility of switching would constrain them to only exercise the benefit of REPAYE via the channel of interest savings. However, allowing them to switch between the two plans would enable them to also benefit from REPAYE via the channel of consumption smoothing. Based on computed consumption equivalents from my model, agents are willing to pay 5.15% of annual consumption to have REPAYE added.