Portfolio Choice and Life Insurance: The CRRA Case |
| |
| Authors: | Huaxiong Huang Moshe A Milevsky Jin Wang |
| |
| Institution: | 1. Huaxiong Huang is a professor in the Department of Mathematics and Statistics;2. Moshe A. Milevsky is the executive director of the IFID Center and Associate Professor in the Schulich School of Business;3. Jin Wang was a research associate at the IFID Centre, York University, 4700 Keele St., Toronto, Canada, when this article was written. |
| |
| Abstract: | We solve a portfolio choice problem that includes life insurance and labor income under constant relative risk aversion (CRRA) preferences. We focus on the correlation between the dynamics of human capital and financial capital and model the utility of the family as opposed to separating consumption and bequest. We simplify the underlying Hamilton–Jacobi–Bellman equation using a similarity reduction technique that leads to an efficient numerical solution. Households for whom shocks to human capital are negatively correlated with shocks to financial capital should own more life insurance with greater equity/stock exposure. Life insurance hedges human capital and is insensitive to the family's risk aversion, consistent with practitioner guidance. |
| |
| Keywords: | |
|
|
