Consumption and Portfolio Choice over the Life-Cycle
نویسندگان
چکیده
This paper solves a realistically calibrated life-cycle model of consumption and portfolio choice with uninsurable labor income risk and borrowing constraints. Since labor income substitutes for riskless asset holdings the optimal share invested in equities is roughly decreasing over life. We compute a measure of the importance of non-tradable human capital for investment behavior to find that ignoring labor income generates large utility costs, while the cost of ignoring only its risk is an order of magnitude smaller. We also quantify the utility cost associated with typical heuristics advocated by financial advisors. JEL classifications: E21, G11
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