Precautionary saving and portfolio allocation: DP by GMM

Arbeitspapier

There is much research on consumption-savings problems with risky labor income and a constant interest rate and also on portfolio allocation with risky returns but nonstochastic labor income. Less is known quantitatively about the interaction between the two forms of risk. Under CRRA utility, undiversifiable income risk should be reflected in both savings rates and portfolio allocations. To quantify these effects in a model of consumption and portfolio choice, we adopt a semi-parametric projection method for solving dynamic programmes, based on generalized method of moments estimation of the parameters of approximate decision rules. We find that background income risk does affect optimal portfolios but that this effect may be difficult to detect empirically.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Queen's Economics Department Working Paper ; No. 1247

Classification and Topics

• Classification: Wirtschaft ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Portfolio Choice; Investment Decisions ; Computational Techniques; Simulation Modeling
• Subject: portfolio theory ; precautionary saving

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Letendre, Marc-Andre ; Smith, Gregor
• Event: Veröffentlichung
• (who): Queen's University, Department of Economics
• (where): Kingston (Ontario)
• (when): 2000

Further information

• Handle: http://hdl.handle.net/10419/67792
• Last update: 10.03.2025, 11:42 AM CET