Dynamic Asset Allocation When Bequests are Luxury Goods

16 Pages Posted: 24 May 2014

See all articles by Jie Ding

Jie Ding

Macquarie University

Geoffrey Kingston

Macquarie University

Sachi Purcal

Macquarie University - Department of Actuarial Studies; Financial Research Network (FIRN); Macquarie University, Macquarie Business School

Date Written: May 20, 2013

Abstract

Luxury bequests impart systematic effects of age to an investor's optimal allocation: the expected percentage allocation to equities rises throughout retirement. When bequests are luxuries the marginal utility of bequests declines more slowly than the marginal utility of consumption. This is essentially lower risk aversion. As a retiree approaches death, her expected remaining lifetime utility is increasingly composed of bequest utility, and thus generates progressively lower risk aversion. A retiree responds by increasingly favoring the higher-return risky asset. Compared to standard preferences, luxury bequests elevate a retiree's average exposure to risky assets, but the difference is small in early retirement.

Keywords: bequests, luxury goods, dynamic asset allocation, Merton portfolio problem, European put option, retirement risk zone

JEL Classification: D14, G11, G23

Suggested Citation

Ding, Jie and Kingston, Geoffrey and Purcal, Sachi, Dynamic Asset Allocation When Bequests are Luxury Goods (May 20, 2013). CIFR Paper No. 003/2014, Available at SSRN: https://ssrn.com/abstract=2440987 or http://dx.doi.org/10.2139/ssrn.2440987

Jie Ding (Contact Author)

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Geoffrey Kingston

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Sachi Purcal

Macquarie University - Department of Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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