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On the empirical relevance of cointegration between stock market returns and labor income on optimal portfolio choice
Stockholm University, Faculty of Social Sciences, Department of Economics.
(English)Manuscript (preprint) (Other academic)
Abstract [en]

I investigate the empirical relevance of cointegration between labor income and (cumulative) equity returns on the optimal choice between equity and risk-free bonds for finitely lived households facing an exogenously given economic environment. Benzoni et al. (2007) showed that such cointegration implies that households should save only in risk-free bonds when young, and increase the share of equity in the portfolio as they grow older. Since this result is a reversal of conventional wisdom, I investigate if the empirical cointegration relationship is strong enough to be relevant when households make investment decisions. Using an economic environment estimated on US data between 1929-2016, I find that cointegration exists, but that it is not strong enough to result in an increasing equity share with age.

Keyword [en]
portfolio choice, cointegration, long run risk, life cycle, vector error correction
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:su:diva-155080OAI: oai:DiVA.org:su-155080DiVA, id: diva2:1196770
Available from: 2018-04-11 Created: 2018-04-11 Last updated: 2018-04-11Bibliographically approved
In thesis
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