Abstract
This paper investigates optimal consumption and portfolio decisions with nontradable labor income and flexible labor supply. This paper considers risky labor income in a setting where wage income and stock returns are not perfectly correlated. The paper provides approximate closed-form solutions to the problem, allowing for a thorough characterization of the optimal consumption and portfolio policies. These solutions show that, when labor income risk is idiosyncratic, the presence of labor/leisure choice can have dramatic positive effects on portfolio allocations relative to the benchmark in which labor income is exogenously given to the investor. The main mechanism delivering this result is that consumption becomes less sensitive to financial downfalls, thus raising the incentive to participate in the stock market.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
