Menoncin, Francesco and Regis, Luca Longevity assets and pre-retirement consumption/portfolio decisions. EIC working paper series #2/2015 IMT Institute for Advanced Studies ISSN 2279-6894.
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We derive a closed form solution for the optimal consumption/investment problem of an agent whose force of mortality is stochastic and whose financial horizon coincides with a fixed retirement date. The investment set includes a longevity asset, as a derivative on the force of mortality. We explore the optimal choices of a representative agent having Hyperbolic Absolute Risk Aversion preferences on both consumption and final wealth. Our numerical analysis shows that individuals optimally invest a large fraction of their wealth in the longevity asset. In our base scenario, calibrated on real world data, a 60-year old male retiring after 5 years should invest around 88% of his wealth in the longevity asset. Such a percentage decreases as time to retirement decreases. We explore sensitivity of our results to market and individual characteristics.
|Item Type:||Working Paper (EIC working paper series)|
|Uncontrolled Keywords:||JEL codes: C61; G11 - Keywords: longevity risk, pre-retirement savings, consumption/portfolio choices, HARA preferences.|
|Subjects:||H Social Sciences > HB Economic Theory|
|Research Area:||Economics and Institutional Change|
|Depositing User:||Caterina Tangheroni|
|Date Deposited:||05 May 2015 07:54|
|Last Modified:||05 May 2015 08:22|
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