Abstract
Next we will include labor income into our asset accumulation and asset allocation decisions. This brings us to the problem of pension funds and retirement income. Academics, journalists and politicians have recently discussed in particular the issue of uncovered future retirement and pension fund liabilities. Many questions are being raised in this context.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
In the US there is currently a public discussion on wealth inequality which seems to be greater than inequality from income, see Jacoby (2008) and Milanovic (2010). Moreover, old age inequality in wealth appears to be even more distinct, see Jacoby (2008) and Cagetti and De Nardi (2006). The latter trend appears to be a challenging issue for wealth and pension fund managements. We will discuss those issues briefly at the end of this chapter.
- 2.
- 3.
This is for example the main theme of a recent book by Shiller (2012).
- 4.
The World Bank has since long pursued the research concerning institutional issues.
- 5.
- 6.
For a study of there is also risk involved in public pension funds, see Shoven and Slavov (2006).
- 7.
As Blanchard (1985), based on Modigliani (1976), argues, agents are at different ages and have different levels of wealth. Different levels of wealth set different initial conditions but a different age also means different saving rate or propensity to consume. So, there is normally a difficult aggregation problem in order to obtain an aggregate model. Yet, this problem will be resolved by a procedure that Blanchard (1985) has suggested and as we have discussed in Chap. 5
- 8.
In our context we use again spectral analysis to decompose a data set into low frequency movements and residuals. For a more detailed description and further examples, see Hsiao and Semmler (2009).
- 9.
- 10.
A similar distinction between asset income and labor income, arising from earnings, is made in Benhabib et al. (2014).
- 11.
This might also change, if one assumes endogenous labor supply, as in RBC models.
- 12.
- 13.
For details and empirical estimates on default spread, see Semmler (2011).
- 14.
For a detailed study of the comovements of output and labor market variables, using the HP-filter, the BP-filter and Penalized Splines, see Kauermann et al. (2011), see also Stock and Watson (1999) who use the BP filter. As in the other examples, the cyclical components of the labor market variables come out more distinctively for the spline-filter than from the HP- and BP-filters.
- 15.
For an example, see the Appendix.
- 16.
Again we use here the well established fact that long run investors would respond to new investment opportunities given by the time path of the (risk free) interest rate and the equity return. Of course, a myopic risk averse investor, investing in a static Markowitz portfolio, would hold a fixed fraction of bonds in his/her portfolio.
- 17.
For details of a dynamic programming procedure applicable to the problem at hand, see Semmler and Hsiao (2011).
- 18.
Note that our above formulation is similar to the one by Blanchard (1985) who has introduced instead of the term R e, t , a fixed insurance pay-out term received by the agents if he/she dies, determined by the probability to die. But note that the insurance company has to get the payout term in the Blanchard model from the asset market, which, in our case, it can pay out as risky return, after deducting some transaction fee. Thus, our model can be read as the Blanchard model, but we have time depending risk free and risky returns. Yet in both cases, in the Blanchard case as well as in our case above, the discount rate, δ, needs to be viewed as being modified by the probability to die, which is inversely related to the expected life time of the agent. If the probability to die goes to zero, then one approaches again the usual infinite horizon optimization model.
- 19.
Note that we would have also a similar phenomenon of a cyclical wealth movement as well as a downward trend in wealth accumulation with a high parameter of risk aversion, see Semmler and Hsiao (2011). Both parameters mainly affect the wealth accumulation through consumption and saving decisions.
- 20.
See Stein (2012) and Brunnermeier and Sannikov (2014).
- 21.
For details of the distributional effects of high leveraging, see Brunnermeier and Sannikov (2014).
- 22.
A case that is concentrated on in Carroll et al. (2014).
- 23.
Consumption might have an upper limit for holders of large wealth and thus the saving rate may be higher.
- 24.
See the Kaldor and Pasinetti debate on savings rate and asset accumulation in the 1970s, and a summary of diverse studies on this issue in Nell and Semmler (1991). Differential in saving rates is also an assumption that some econo-physicists work with.
Bibliography
Altug, P., & Labadie, S. (2008). Asset pricing for dynamic economies. Cambridge: Cambridge University Press.
Benhabib, J., Bisin, A., & Zhu, S. (2014). The Wealth Distribution in Bewley Models with Investment Risk. NBER Working Papers 20157, National Bureau of Economic Research, Inc.
Blanchard, O. (1985). Debt, deficit and finite horizon. Journal of Political Economy, 93(2), 223–247.
Brunnermeier, M., & Sannikov, Y. (2014). A macroeconomic model with a financial sector. American Economic Review, 104(2), 379–421.
Bureau of Economic Analysis, U.S. Department of Commerce (2008). Wage and Salary Data, NIPA data Washington, DC.
Cagetti, M., & De Nardi, M. (2006). Entrepreneurship, frictions, and wealth. Journal of Political Economy, 114(5), 835–870.
Campbell, J. Y., & Viceira, L. M. (2002). Strategic asset allocation: Portfolio choice for long-term investors. Clarendon lectures in economics. Oxford University Press.
Carroll, C., Slacalek, J., & Tokuoka, K. (2014). The Distribution of Wealth and the Marginal Propensity to Consume. Working Paper Series 1655, European Central Bank.
Danthine, J.-P., & Donaldson, J. B. (2005). Intermediate financial theory. Advanced finance series (2nd ed.). Academic.
Feldstein, M., & Liebman, J. B. (2001). Social Security. NBER Working Paper No. 8451.
Ghilarducci (2008), When I’m sixty-four: The plot against pensions and the plan to save them. Princeton University Press.
Hsiao, C.-Y., & Semmler, W. (2009). Harmonic Analysis of Long Run Financial Data. Working Paper. http://www.newschool.edu/nssr/cem/papers/wp/financial/HsiaoSemmlerHarmonicFit.pdf
Jacoby, S. (2008). Finance and Labor: Risk and Inequality. University of Berkeley, Working Paper. http://www.anderson.ucla.edu/faculty/management-and-organizations/faculty-jacoby-research
Kauermann, G., Semmler, W., & Krivobokova, T. (2011). Filtering time series with penalized splines. Studies in Nonlinear Dynamics and Econometrics, 15, 21–26.
Kotlikoff, L., & Burns, S. (2005). The coming generational storm: What you need to know about America’s economic future. Cambridge: MIT Press.
Kumhof, M., Ranciere, R., & Winant, P. (2015). Inequality, leveraging and crises. American Economic Review, 105(3), 1217–45.
Milanovic, B. (2010). Worlds apart. Measuring international and global inequality. Princeton: Princeton University Press.
Modigliani, F. (1976). Individual thrift, life cycle, and the wealth of nation. American Economic Review, 76(3), 297–313.
Nell, E., & Semmler, W. (1991). Nicholas Kaldor and Mainstream Economics: Confrontation and Convergence. Essays from the Kaldor Conference. London: Macmillan.
Piketty, T. (2014). Capital in the twenty-first century. Boston: Harvard University Press.
Semmler, W. (2011). Asset prices, booms and recessions. Heidelberg, NY: Springer Publishing House.
Semmler, W., Grüne, L., & Öhrlein, L. (2009). Dynamic consumption and portfolio decisions with time varying asset returns. Journal of Wealth Management, 12(3), 5–47.
Semmler, W., & Hsiao, C.-Y. (2011). Dynamic consumption and portfolio decisions with low frequency movements of asset returns. The Journal of Wealth Management, 14(2), 101–111.
Shiller, R. (2012). Finance and the Good Society. Princeton: Princeton University Press.
Shoven, J., & Slavov, S. (2006). Political Risk and Social Security. NBER Working Paper No. 12135.
Stock. J., & Watson, M. (1999). Business cycle fluctuations and U.S. macroeconomic times series. In Handbook of macroeconomics (Vol. 1, pp. 3–64). North Holland.
Viciera, L. (2001). Optimal portfolio choice for long-horizon investors with nontradable labor income. Journal of Finance, 56(2), 433–470.
Wolff, E. (2013). The Asset Price Meltdown and the Wealth of the Middle Class. NBER Working Paper No. 18559.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2016 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Chiarella, C., Semmler, W., Hsiao, CY., Mateane, L. (2016). Asset Accumulation and Portfolio Decisions with Time Varying Asset Returns and Labor Income. In: Sustainable Asset Accumulation and Dynamic Portfolio Decisions. Dynamic Modeling and Econometrics in Economics and Finance, vol 18. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-49229-1_6
Download citation
DOI: https://doi.org/10.1007/978-3-662-49229-1_6
Published:
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-662-49228-4
Online ISBN: 978-3-662-49229-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)