Stock Market Mean Reversion and Portfolio Choice Over the Life Cycle

2015 ◽  
Author(s):  
Alexander Michaelides ◽  
Yuxin Zhang
Keyword(s):  
Life Cycle ◽  
Stock Market ◽  
Portfolio Choice ◽  
Mean Reversion

scholarly journals Hyperbolic discounting and life-cycle portfolio choice

2015 ◽  
Vol 14 (4) ◽  
pp. 492-524 ◽  
Author(s):  
DAVID LOVE ◽  
GREGORY PHELAN
Keyword(s):  
Life Cycle ◽  
Stock Market ◽  
Portfolio Choice ◽  
Asset Allocation ◽  
Financial Literacy ◽  
Hyperbolic Discounting ◽  
Fixed Cost ◽  
Future Earnings ◽  
Financial Wealth ◽  
The Impact

AbstractThis paper studies how hyperbolic discounting affects stock market participation, asset allocation, and saving decisions over the life cycle in an economy with Epstein–Zin preferences. Hyperbolic discounting affects saving and portfolio decisions through at least two channels: (1) it lowers desired saving, which decreases financial wealth relative to future earnings; and (2) it lowers the incentive to pay a fixed cost to enter the stock market. We find that hyperbolic discounters accumulate less wealth relative to their geometric counterparts and that they participate in the stock market at a later age. Because they have lower levels of financial wealth relative to future earnings, hyperbolic discounters who do participate in the stock market tend to hold a higher share of equities, particularly in the retirement years. We find that increasing the elasticity of intertemporal substitution, holding risk aversion constant, greatly magnifies the impact of hyperbolic discounting on all of the model's decision rules and simulated levels of participation, allocation, and wealth. Finally, we introduce endogenous financial knowledge accumulation and find that hyperbolic discounting leads to lower financial literacy and inefficient stock market investment.

scholarly journals Stock Market Mean Reversion and Portfolio Choice over the Life Cycle

2017 ◽  
Vol 52 (3) ◽  
pp. 1183-1209 ◽  
Author(s):  
Alexander Michaelides ◽  
Yuxin Zhang
Keyword(s):  
Life Cycle ◽  
Stock Market ◽  
Portfolio Choice ◽  
Short Sales ◽  
Income Risk ◽  
Welfare Losses ◽  
Out Of Sample ◽  
Target Date ◽  
Target Date Funds ◽  
Timing Strategies

We solve for optimal consumption and portfolio choice in a life-cycle model with short-sales and borrowing constraints; undiversifiable labor income risk; and a predictable, time-varying, equity premium and show that the investor pursues aggressive market timing strategies. Importantly, in the presence of stock market predictability, the model suggests that the conventional financial advice of reducing stock market exposure as retirement approaches is correct on average, but ignoring changing market information can lead to substantial welfare losses. Therefore, enhanced target-date funds (ETDFs) that condition on expected equity premia increase welfare relative to target-date funds (TDFs). Out-of-sample analysis supports these conclusions.

Life-Cycle Portfolio Choice with Imperfect Predictors

2019 ◽  
Author(s):  
Alexander Michaelides ◽  
Yuxin Zhang
Keyword(s):  
Life Cycle ◽  
Portfolio Choice

Financial flexibility, managerial efficiency and firm life cycle on firm performance

2019 ◽  
Vol 16 (2) ◽  
pp. 168-180
Author(s):  
Heng-Yu Chang ◽  
Chun-Ai Ma
Keyword(s):  
Life Cycle ◽  
Firm Performance ◽  
Stock Market ◽  
Life Cycles ◽  
Mature Stage ◽  
Chinese Stock Market ◽  
Financial Flexibility ◽  
Content Type ◽  
Listed Firms ◽  
Managerial Efficiency

Purpose As the capital market in China is still developing, several constraints on a Chinese-listed firm’s financing strategy have a direct impact on its financial flexibility. The purpose of this paper is to reconstruct traditional financial flexibility index (FFI) derived from the western context, provide empirical evidence within eastern context by modified FFI and examine how the managerial efficiency of Chinese-listed firms is demonstrated with modified FFI to escort corporate life cycle hypothesis. Design/methodology/approach By tailored FFI to fit the contemporary operations of Chinese-listed firms, this study investigates how managerial efficiency varies across different life stages to demonstrate the moderating power in the firm performance of financially flexible firm. Findings It is found that financially flexible firms in the Chinese stock market generally experience good firm performance, yet the managerial efficiency could gradually be diminishing at their mature stage even firms’ financial flexibility remains consistent with the agency theory. This paper sheds light on the necessity to reexamine the components in financial flexibility based on the eastern context, and provides avenue to further understand the managerial behavior of Chinese listed firms when considering firm life cycles. Research limitations/implications Although it is difficult for this current study to offer the precise weights on each factor in calculating financial flexibility, the judgment matrix method is adopted to at least provide reliable estimates in accordance with Chinese business contexts with less than 10 percent errors in contrast to the actual weights. Practical implications This modified FFI is particularly suitable for Chinese-listed firms under certain unique financial reporting regulations by adjusting a number of weights and factors. This study may help practitioners understand the managerial conduct of publicly listed firms in China. Originality/value The paper constructs a modified FFI with Chinese stock market characteristics embedded, and provides insightful evidence to explain the new pecking order theory by considering the life cycle stage of Chinese-listed companies.

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