Life-Cycle Asset Allocation and Unemployment Risk
20 Pages Posted: 8 Mar 2016
Date Written: October 1, 2015
In this paper we extend the traditional life cycle model of saving and portfolio choice to allow for possible long-term unemployment spells to have permanent effects on subsequent labor income prospects. The risk of losing future labor income could imply strong human capital erosion for the investor at any age, dampening the incentive to invest in risky stocks. The resulting optimal portfolio share invested in stocks may be relatively flat in age, more in line with the available evidence and contrary to the predictions of traditional life-cycle models.
Keywords: Life-cycle portfolio choice, unemployment risk, human capital depreciation, age rule
JEL Classification: D91, E21, G11
Suggested Citation: Suggested Citation