111
IRUS Total
Downloads

Stock market mean reversion and portfolio choice over the life cycle

File Description SizeFormat 
Paper_latest_sci_nov.pdfAccepted version453.95 kBAdobe PDFView/Open
Title: Stock market mean reversion and portfolio choice over the life cycle
Authors: Michaelides, A
Zhang, Y
Item Type: Journal Article
Abstract: 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.
Issue Date: 15-Jun-2017
Date of Acceptance: 18-Nov-2015
URI: http://hdl.handle.net/10044/1/27733
DOI: 10.1017/S0022109017000357
ISSN: 0022-1090
Publisher: Cambridge University Press (CUP)
Start Page: 1183
End Page: 1209
Journal / Book Title: Journal of Financial and Quantitative Analysis
Volume: 52
Issue: 3
Copyright Statement: © Michael G. Foster School of Business, University of Washington 2017
Sponsor/Funder: Commission of the European Communities
Funder's Grant Number: PCIG14-GA-2013-631814
Keywords: Social Sciences
Business, Finance
Economics
Business & Economics
STRATEGIC ASSET ALLOCATION
CHAIN APPROXIMATIONS
LONG-RUN
CONSUMPTION
RETURNS
RISK
PREDICTABILITY
DECISIONS
COSTS
SUBSTITUTION
Portfolio Choice over the Life Cycle
Stock Market Mean Reversion
Stock Market Predictability
Hedging Demands
Lifestyle funds
enhanced target-date funds
Finance
1501 Accounting, Auditing and Accountability
1502 Banking, Finance and Investment
Publication Status: Published
Online Publication Date: 2017-06-15
Appears in Collections:Imperial College Business School