Dynamic asset allocation with stochastic income and interest rates

Claus Munk and Carsten Sørensen

Journal of Financial Economics, 2010, vol. 96, issue 3, 433-462

Abstract: We solve for optimal portfolios when interest rates and labor income are stochastic with the expected income growth being affine in the short-term interest rate in order to encompass business cycle variations in wages. Our calibration based on the Panel Study of Income Dynamics (PSID) data supports this relation with substantial variation across individuals in the slope of this affine function. The slope is crucial for the valuation and riskiness of human capital and for the optimal stock/bond/cash allocation both in an unconstrained complete market and in an incomplete market with liquidity and short-sales constraints.

Keywords: Portfolio; management; Labor; income; risk; Interest; rate; risk; Business; cycle; Life-cycle (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (74)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:96:y:2010:i:3:p:433-462

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