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Intertemporal optimal portfolio choice based on labor income within shadow costs of incomplete information and short sales

  • S.I.: Risk in Financial Economics
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Abstract

This paper examines the optimal portfolio choice in the presence of risky labor income, retirement horizon and shadow costs of incomplete information and short sales. The optimal allocation to stocks is larger for employed investors than for retired investors within idiosyncratic labor income risk, incomplete information and short sales. Investors’ willingness to save is increased when increasing idiosyncratic labor income risk in the presence of incomplete information and short sales, while it is decreased when retired investors still keep partial of their income flow. Hence, they reduce their stock portfolio allocation towards the level of retired investors. The presence of a positive correlation between labor income and stock returns reduces stockholdings below the level of retired investors within the assumptions of the existence of shadow costs of incomplete information. Our results generalize previous findings in the literature by accounting for the additional impact of information costs and short sales constraints.

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Authors and Affiliations

  1. THEMA, University of Cergy-Pontoise, Cergy-Pontoise, France

    Mondher Bellalah

  2. ISC Paris, Paris, France

    Mondher Bellalah

  3. Department of Statistics, Cornell University, Ithaca, NY, 14850, USA

    Yaosheng Xu

  4. School of Economics, Shandong University, Jinan, 250100, People’s Republic of China

    Detao Zhang

Authors
  1. Mondher Bellalah
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  2. Yaosheng Xu
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  3. Detao Zhang
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Corresponding author

Correspondence to Detao Zhang.

Additional information

D. Zhang: This author is supported in part by Natural Science Foundation of China Grant #11401345.

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Bellalah, M., Xu, Y. & Zhang, D. Intertemporal optimal portfolio choice based on labor income within shadow costs of incomplete information and short sales. Ann Oper Res 281, 397–422 (2019). https://doi.org/10.1007/s10479-018-2901-4

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  • DOI: https://doi.org/10.1007/s10479-018-2901-4

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