Modeling human capital in life-cycle portfolio choice: Riskless or risky?

  • Ingmar Minderhoud Ingmar Minderhoud

We study the impact of risky human capital in life-cycle portfolio choice and survey the academic literature on the optimal asset allocation over the individual’s life-cycle, where we emphasize the nature of human capital. A distinction is made between the riskless conception of human capital as having bond-like characteristics, and the risky conception of seeing this future income stream as having stock-like properties. In particular, attention will be paid to the models presented in Cocco, Gomes, and Maenhout (2005) and Benzoni, Collin-Dufresne, and Goldstein (2007). We use the idea of Benzoni et al. to study the welfare implications of portfolio choice when labor income and dividends are co-integrated. This dynamic portfolio choice problem is analyzed for two sectors, public and construction, and for the Netherlands as a whole. The results indicate that hump-shaped asset allocations are welfare improving for all three groups. Further, we show that similar conclusions are obtained using a simple vector autocorrection model.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk, gewijd aan het bevorderen van een beter begrip van de economische en sociale gevolgen van pensioenen, vergrijzing en ‘de oude dag’ in Nederland en Europa.


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