Associate Professor of Finance
2005 Best Paper in Finance by Researcher with French Affiliation
This paper solves a realistically calibrated life-cycle model of consumption and portfolio choice with labor income uncertainty and borrowing constraints. Labor income substitutes for riskless asset holdings. The optimal share invested in equities is roughly decreasing over life.The authors evaluate the welfare loss of alternative investment strategies. A typical heuristic advocated by financial advisors ignores potential sources of heterogeneity (in terms of preferences or labor income characteristics) and can thus lead to significant losses.Ignoring labor income generates large utility costs, while the cost of ignoring only labor income risk is an order of magnitude smaller.