Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/67792
Authors: 
Letendre, Marc-Andre
Smith, Gregor
Year of Publication: 
2000
Series/Report no.: 
Queen's Economics Department Working Paper 1247
Abstract: 
There is much research on consumption-savings problems with risky labor income and a constant interest rate and also on portfolio allocation with risky returns but nonstochastic labor income. Less is known quantitatively about the interaction between the two forms of risk. Under CRRA utility, undiversifiable income risk should be reflected in both savings rates and portfolio allocations. To quantify these effects in a model of consumption and portfolio choice, we adopt a semi-parametric projection method for solving dynamic programmes, based on generalized method of moments estimation of the parameters of approximate decision rules. We find that background income risk does affect optimal portfolios but that this effect may be difficult to detect empirically.
Subjects: 
portfolio theory
precautionary saving
JEL: 
D91
G11
C63
Document Type: 
Working Paper

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