Life-Cycle Models with Stock and Labor Market Cointegration: Insights from Analytical Solutions
Type
working paper
Date Issued
2011
Author(s)
Moos, Daniel
Abstract
Two recent articles Lynch and Tan (2011) and Benzoni et al. (2007) show that optimal policies can be on reasonable level over the life-cycle if one takes into account dynamic labor income. This paper examines the economic framework of LT and BCG in complete markets. Based on our analytic results we show that the two models are closely related and that the BCG model can be considered as a special case of the LT model. Moreover, we introduce a two factor model with a cointegration factor that guarantees a long-run equilibrium between the stock and the labor market. We show that under the presence of a cointegration factor, the importance of a second factor decreases.
Language
English
Keywords
consumption/portfolio optimization
labor income
cointegration
time-varying investment opportunities
time-varying labor income growth
HARA-utility
HJB-equation
closed-form solutions
HSG Classification
contribution to scientific community
Refereed
No
Publisher
Working Paper University of St. Gallen
Subject(s)
Division(s)
Eprints ID
207403
File(s)![Thumbnail Image]()
Name
Cointegration Alexandria 111119.pdf
Size
456.45 KB
Format
Adobe PDF
Checksum (MD5)
2731d2659ee2d58ce2e54a4427e44487