Dynamic asset allocation when bequests are luxury goods |
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| Affiliation: | 1. Research Institute of Intelligent Control and Systems, Harbin Institute of Technology, Harbin Heilongjiang, PR China;2. College of Information Science and Technology, Bohai University, Jinzhou, Liaoning 121013, China;1. School of Risk and Actuarial Studies, University of New South Wales, Sydney, Australia;2. CEPAR, Australia;1. CEPAR, School of Risk and Actuarial Studies, University of New South Wales, NSW 2052, Australia;2. Discipline of Finance, The University of Sydney Business School, Economics and Business Building H69, The University of Sydney, NSW 2006 Australia;1. AMP, 33 Alfred Street, Circular Quay, Sydney, NSW 2000, Australia;2. School of Risk and Actuarial Studies, ARC Centre of Excellence in Population Ageing Research (CEPAR), University of New South Wales, Sydney, NSW 2052, Australia;3. Department of Econometrics and Business Statistics, Monash University, Caulfield East, 3145, Australia;1. Lingnan (University) College, Sun Yat-sen University, Guangzhou 510275, PR China;2. Flick Gocke Schaumburg, Brienner Straße 29, 80333 Munich, Germany |
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| Abstract: | ![]()
Luxury bequests impart systematic effects of age to an investor's optimal allocation: the expected percentage allocation to equities rises throughout retirement. When bequests are luxuries the marginal utility of bequests declines more slowly than the marginal utility of consumption. This is essentially lower risk aversion. As a retiree approaches death, her expected remaining lifetime utility is increasingly composed of bequest utility, and thus generates progressively lower risk aversion. A retiree responds by increasingly favoring the higher-return risky asset. Compared to standard preferences, luxury bequests elevate a retiree's average exposure to the risky asset, but the difference is small in early retirement. |
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| Keywords: | Bequests Luxury goods Dynamic asset allocation Merton portfolio problem European put option Retirement risk zone |
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