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Essays in Life-Cycle Finance : Understanding Personal Investment and Consumption Choices

Essays in Life-Cycle Finance : Understanding Personal Investment and Consumption Choices

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JIN, Fangyi, 2009. Essays in Life-Cycle Finance : Understanding Personal Investment and Consumption Choices [Dissertation]. Konstanz: University of Konstanz

@phdthesis{Jin2009Essay-12247, title={Essays in Life-Cycle Finance : Understanding Personal Investment and Consumption Choices}, year={2009}, author={Jin, Fangyi}, address={Konstanz}, school={Universität Konstanz} }

2011-03-25T09:43:46Z Essays in Life-Cycle Finance : Understanding Personal Investment and Consumption Choices application/pdf 2009 terms-of-use Essays über Life-cycle-Finanzierung: zum Verständnis von Haushaltsinvestitionen und Konsumentscheidungen 2011-03-25T09:43:46Z This dissertation is a collection of three stand-alone research papers containing theoretical and empirical research on household portfolio choice and consumption decision in the life time. Household finance is a new interesting field in financial economics that has attracted a lot of attention among financial economists recently. Campbell even gave his presidential address titled "Household Finance" at the 2006 AFA annual meeting. Modeling household finance is different from traditional finance because household financial problems have many special features such as long but finite horizon, non-traded human capital, illiquid housing, borrowing constraints, and complex taxation. Also, household asset demands are important in determining asset prices. Therefore, household portfolio choice is a valuable topic for a doctoral dissertation.<br />Empirical analyses show that low-wealth households tend to be non-participants concerning risky assets and tend to hold a large portfolio share of risky asset if they participate at all (gamblers). So far, few theoretical models have been able to satisfactorily provide a joint understanding of these two observations. Chapter Two solves a novel life-cycle model in which social links to relatives, friends, and public welfare programs play the key role in explaining both types of behaviors. Social and family transfers induce low-wealth households to over-consume and depress the savings motive since social transfers are available only if personal savings are exhausted. The depressed investment demand further increases the fixed participation cost and thus, increases non-participation. On the other hand, if low-wealth households decide to hold any risky asset, they tend to hold rather large and risky investments because the down side risk is insured by help from relatives and public welfare.<br />Chapter Three numerically solves the optimal life-cycle portfolio choice when the model is calibrated to match the empirical retirement age distribution: people tend to retire at markedly higher rates around the firm's early retirement age and the age at which the full pension can be received. The model shows that financial incentives for keeping investors in labor force and low leisure preference for young investors endogenously restrict investors from retiring early. Thus, this chapter suggests a novel effect of the early retirement option on portfolio choice. As opposed to results from earlier models, the optimal portfolio share of stock does not increase monotonically prior to retirement. Wealthy investors might find it optimal to reduce the stock share in their early stage of life in order to decrease the possibility of having insufficient wealth for retirement when they are older. Thus, the model predicts either an increasing or a hump-shaped pattern for life-cycle stock holding, consistent with empirical observations.<br />Chapter Four presents new evidence contradicting the existence of the portfolio composition puzzles concerning household finance: portfolio risk is empirically increasing in age and wealth which is contradicting Merton's (1971) solution. The puzzles cause serious problems in assessing the classical theoretical models that have been developed to rationalize households' portfolio choices. This chapter investigates the 2005 Panel Study of Income Dynamics data and shows that, when the household portfolio includes real estate and private business and allows for leverage, the portfolio risk for young and low-wealth households is in general higher than old and rich households, which is consistent with the predictions of classical models. Jin, Fangyi Jin, Fangyi eng

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