Optimal Consumption and Portfolio Choice For Long-Horizon Investors with Nontradable Labor Income When Asset Returns are Predictable

2011 ◽  
Author(s):  
Hui-Ju Tsai ◽  
Yangru Wu
Keyword(s):  
Portfolio Choice ◽  
Asset Returns ◽  
Optimal Consumption ◽  
Labor Income

scholarly journals BAYESIAN ESTIMATION OF ASYMMETRIC JUMP-DIFFUSION PROCESSES

2014 ◽  
Vol 09 (03) ◽  
pp. 1450008 ◽  
Author(s):  
SAMUEL J. FRAME ◽  
CYRUS A. RAMEZANI
Keyword(s):  
Bayesian Estimation ◽  
Portfolio Choice ◽  
Stock Prices ◽  
Asset Returns ◽  
Jump Diffusion ◽  
Empirical Literature ◽  
Leverage Effect ◽  
Parameter Estimates ◽  
Price Process ◽  
The Impact

The hypothesis that asset returns are normally distributed has been widely rejected. The literature has shown that empirical asset returns are highly skewed and leptokurtic. The affine jump-diffusion (AJD) model improves upon the normal specification by adding a jump component to the price process. Two important extensions proposed by Ramezani and Zeng (1998) and Kou (2002) further improve the AJD specification by having two jump components in the price process, resulting in the asymmetric affine jump-diffusion (AAJD) specification. The AAJD specification allows the probability distribution of the returns to be asymmetrical. That is, the tails of the distribution are allowed to have different shapes and densities. The empirical literature on the "leverage effect" shows that the impact of innovations in prices on volatility is asymmetric: declines in stock prices are accompanied by larger increases in volatility than the reverse. The asymmetry in AAJD specification indirectly accounts for the leverage effect and is therefore more consistent with the empirical distributions of asset returns. As a result, the AAJD specification has been widely adopted in the portfolio choice, option pricing, and other branches of the literature. However, because of their complexity, empirical estimation of the AAJD models has received little attention to date. The primary objective of this paper is to contribute to the econometric methods for estimating the parameters of the AAJD models. Specifically, we develop a Bayesian estimation technique. We provide a comparison of the estimated parameters under the Bayesian and maximum likelihood estimation (MLE) methodologies using the S&P 500, the NASDAQ, and selected individual stocks. Focusing on the most recent spectacular market bust (2007–2009) and boom (2009–2010) periods, we examine how the parameter estimates differ under distinctly different economic conditions.

scholarly journals Consumption and Portfolio Choice under Internal Multiplicative Habit Formation

2019 ◽  
Vol 55 (7) ◽  
pp. 2334-2371
Author(s):  
Servaas van Bilsen ◽  
A. Lans Bovenberg ◽  
Roger J. A. Laeven
Keyword(s):  
Portfolio Choice ◽  
Habit Formation ◽  
Optimal Consumption ◽  
Investment Behavior ◽  
Risky Assets ◽  
General Utility ◽  
Marginal Propensity To Consume ◽  
Investment Opportunities ◽  
Marginal Propensity ◽  
Optimal Consumption And Investment

This paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit. We obtain closed-form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint. This enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock–bond investments. We also show that in a setting that combines habit formation with Epstein–Zin utility, consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease.

SOCIAL SECURITY EVALUATION: A CRITIQUE

2005 ◽  
Vol 9 (1) ◽  
pp. 57-97 ◽  
Author(s):  
JORGE SOARES
Keyword(s):  
Social Security ◽  
Direct Effect ◽  
Well Being ◽  
Social Security System ◽  
Security System ◽  
Security Evaluation ◽  
Optimal Consumption ◽  
Labor Income ◽  
Lifetime Income ◽  
The Impact

I study the bias of actuarially fair measures commonly used to evaluate the impact of a social security system on the well-being of individuals. I investigate how the magnitude of this bias is affected by different features of a pay-as-you-go social security system. Social security affects an individual's welfare in ways other than through its direct effect on her lifetime income. It influences labor and savings decisions and hence factor prices, affecting labor income and the return to savings. Although social security can provide insurance against risk, it can also push borrowing-constrained individuals further away from their optimal consumption paths. I show that, by ignoring these features, actuarially fair measures can grossly misevaluate the impact of social security on the well-being of an individual.

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