Faculty of Economics and Business Administration Publications Database

Predictors and portfolios over the life cycle

Munk, Claus
Volume: 100
Pages: 1 - 27
Month: March
ISSN-Print: 0378-4266
Link External Source: Online Version
Year: 2019
Keywords: Return predictability; Scenarios; Welfare; Performance; Housing

In a calibrated consumption-portfolio model with stock, housing, and labor income predictability, we evaluate the welfare effects of predictability on life-cycle consumption-portfolio choice. We compare skilled investors who are able to take advantage of all sources of predictability with unskilled investors ignoring predictability. For an unskilled investor the certainty equivalent of wealth is 0.3–6.8% lower than for a skilled investor, depending on the market entry date. We also determine the effect of luck to enter the market at a favorable time. Across market entry dates, skilled but unlucky investors can lose up to 15.4% compared to unskilled but lucky investors.