Portfolio Choice over the Life-Cycle when the Stock and Labor Markets Are Cointegrated





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    • Luca Benzoni is from the Federal Reserve Bank of Chicago and the Federal Reserve Bank of St. Louis; Pierre Collin-Dufresne is from the Haas School of Business, University of California at Berkeley, Goldman Sachs, and NBER; and Robert S. Goldstein is from the Carlson School of Management, University of Minnesota, and NBER. We thank Alexandre Baptista, Marco Cagetti, Graham Candler, Gjergji Cici, João Cocco, Bernard Dumas, Murray Frank, Lorenzo Garlappi, Francisco Gomes, Luigi Guiso, John Heaton, Ravi Jagannathan, Ross Levine, Hong Liu, Debbie Lucas, James MacKinnon, Valery Polkovnichenko, Rob Stambaugh (the Editor), Chris Telmer, Stijn Van Nieuwerburgh, Luis Viceira, Amir Yaron, the anonymous Associate Editor and Referee, and seminar participants at Washington University, the University of Virginia, the 2005 WFA conference, and the 2006 AEA conference for helpful comments and suggestions. We are grateful to Huiyan Qiu, who provided excellent research assistance. Part of this research was done while Luca Benzoni was a visiting scholar at the Kellogg School of Management in 2003 and was supported by a 3M Nontenured Faculty Grant and a grant by the McKnight Foundation. All errors remain our sole responsibility. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Banks of Chicago or St. Louis or the Federal Reserve System.


We study portfolio choice when labor income and dividends are cointegrated. Economically plausible calibrations suggest young investors should take substantial short positions in the stock market. Because of cointegration the young agent's human capital effectively becomes “stock-like.” However, for older agents with shorter times-to-retirement, cointegration does not have sufficient time to act, and thus their human capital becomes more “bond-like.” Together, these effects create hump-shaped life-cycle portfolio holdings, consistent with empirical observation. These results hold even when asset return predictability is accounted for.