scholarly journals Stock Market Mean Reversion and Portfolio Choice over the Life Cycle

2017 ◽  
Vol 52 (3) ◽  
pp. 1183-1209 ◽  
Author(s):  
Alexander Michaelides ◽  
Yuxin Zhang
Keyword(s):  
Life Cycle ◽  
Stock Market ◽  
Portfolio Choice ◽  
Short Sales ◽  
Income Risk ◽  
Welfare Losses ◽  
Out Of Sample ◽  
Target Date ◽  
Target Date Funds ◽  
Timing Strategies

We solve for optimal consumption and portfolio choice in a life-cycle model with short-sales and borrowing constraints; undiversifiable labor income risk; and a predictable, time-varying, equity premium and show that the investor pursues aggressive market timing strategies. Importantly, in the presence of stock market predictability, the model suggests that the conventional financial advice of reducing stock market exposure as retirement approaches is correct on average, but ignoring changing market information can lead to substantial welfare losses. Therefore, enhanced target-date funds (ETDFs) that condition on expected equity premia increase welfare relative to target-date funds (TDFs). Out-of-sample analysis supports these conclusions.

Balancing on the Life Cycle: Target-Date Funds Need Better Diversification

2016 ◽  
Vol 42 (4) ◽  
pp. 12-27 ◽  
Author(s):  
Jusvin Dhillon ◽  
Antti Ilmanen ◽  
John Liew
Keyword(s):  
Life Cycle ◽  
Target Date ◽  
Target Date Funds

scholarly journals Hyperbolic discounting and life-cycle portfolio choice

2015 ◽  
Vol 14 (4) ◽  
pp. 492-524 ◽  
Author(s):  
DAVID LOVE ◽  
GREGORY PHELAN
Keyword(s):  
Life Cycle ◽  
Stock Market ◽  
Portfolio Choice ◽  
Asset Allocation ◽  
Financial Literacy ◽  
Hyperbolic Discounting ◽  
Fixed Cost ◽  
Future Earnings ◽  
Financial Wealth ◽  
The Impact

AbstractThis paper studies how hyperbolic discounting affects stock market participation, asset allocation, and saving decisions over the life cycle in an economy with Epstein–Zin preferences. Hyperbolic discounting affects saving and portfolio decisions through at least two channels: (1) it lowers desired saving, which decreases financial wealth relative to future earnings; and (2) it lowers the incentive to pay a fixed cost to enter the stock market. We find that hyperbolic discounters accumulate less wealth relative to their geometric counterparts and that they participate in the stock market at a later age. Because they have lower levels of financial wealth relative to future earnings, hyperbolic discounters who do participate in the stock market tend to hold a higher share of equities, particularly in the retirement years. We find that increasing the elasticity of intertemporal substitution, holding risk aversion constant, greatly magnifies the impact of hyperbolic discounting on all of the model's decision rules and simulated levels of participation, allocation, and wealth. Finally, we introduce endogenous financial knowledge accumulation and find that hyperbolic discounting leads to lower financial literacy and inefficient stock market investment.

The Duration Puzzle in Life-Cycle Investment*

2020 ◽  
Vol 24 (6) ◽  
pp. 1271-1311
Author(s):  
Servaas van Bilsen ◽  
Ilja A Boelaars ◽  
A. Lans Bovenberg
Keyword(s):  
Human Capital ◽  
Life Cycle ◽  
Portfolio Theory ◽  
Optimal Portfolio ◽  
Inflation Risk ◽  
Target Date ◽  
Target Date Funds ◽  
Portfolio Allocations ◽  
The Impact

Abstract By analyzing the portfolio allocations of target date funds (TDFs), we document that the observed durations of TDF portfolios are inconsistent with the durations predicted by classical portfolio theory. We call this stylized fact the duration puzzle. We investigate to what extent several extensions of classical portfolio theory can explain the duration puzzle. More specifically, we consider the impact of human capital, inflation risk, and portfolio restrictions on the duration of the optimal portfolio. We find that it is difficult to explain the duration puzzle, especially for individuals aged between 35 and 65 years.

scholarly journals Target-date funds and portfolio choice in 401(k) plans

2021 ◽  
pp. 1-18
Author(s):  
Olivia S. Mitchell ◽  
Stephen P. Utkus
Keyword(s):  
Portfolio Choice ◽  
Low Cost ◽  
Investment Decisions ◽  
Idiosyncratic Risk ◽  
Retirement Plans ◽  
Fund Managers ◽  
Company Stock ◽  
Target Date ◽  
Target Date Funds ◽  
Retirement Wealth

Abstract Target-date funds in corporate retirement plans grew from $5 billion in 2000 to $734 billion in 2018, partly because federal regulation sanctioned these as default investments in automatic enrollment plans. We show that adopters delegated pension investment decisions to fund managers selected by plan sponsors. Inclusion of these funds in retirement saving menus raised equity shares, boosted bond exposures, curtailed cash/company stock holdings, and reduced idiosyncratic risk. The adoption of low-cost target-date funds may enhance retirement wealth by as much as 50% over a 30-year horizon.

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