Portfolio implications of cointegration between labor income and dividends

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This paper analyzes the implications of cointegration between labor income and dividends for the optimal portfolio weight for stocks. In a recent paper, Benzoni et al. (J Finance 62:2123–2167, 2007) claim that, as a result of cointegration, the optimal weight in stocks may be smaller for young investors than for older investors. This contradicts the traditional life-cycle models which typically imply portfolio weights that decrease with age. This paper shows that when stock returns are affected by other factors than dividend growth, for example due to time-varying discount rates, the portfolio implications of cointegration are much less severe. In a realistically calibrated model, the life-cycle pattern for the portfolio weight of stocks is flat, except for very young investors.
Original languageEnglish
Pages (from-to)397-412
JournalDe Economist
Volume160
Publication statusPublished - 2012

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Cointegration
Dividends
Labor income
Investors
Finance
Life-cycle model
Optimal portfolio
Time-varying
Life cycle
Stock returns
Discount rate
Factors

Cite this

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abstract = "This paper analyzes the implications of cointegration between labor income and dividends for the optimal portfolio weight for stocks. In a recent paper, Benzoni et al. (J Finance 62:2123–2167, 2007) claim that, as a result of cointegration, the optimal weight in stocks may be smaller for young investors than for older investors. This contradicts the traditional life-cycle models which typically imply portfolio weights that decrease with age. This paper shows that when stock returns are affected by other factors than dividend growth, for example due to time-varying discount rates, the portfolio implications of cointegration are much less severe. In a realistically calibrated model, the life-cycle pattern for the portfolio weight of stocks is flat, except for very young investors.",
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Portfolio implications of cointegration between labor income and dividends. / de Jong, F.C.J.M.

In: De Economist, Vol. 160, 2012, p. 397-412.

Research output: Contribution to journalArticleScientificpeer-review

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