Retirement Flexibility and Portfolio Choice in General Equilibrium

Tinbergen Institute Discussion Paper 11-038/DSF13

49 Pages Posted: 21 Feb 2011

See all articles by Yvonne Adema

Yvonne Adema

CPB Netherlands Bureau of Economic Policy Analysis

Jan Bonenkamp

CPB Netherlands Bureau of Economic Policy Research

A. C. Meijdam

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics

Date Written: February 4, 2011

Abstract

This paper explores the interaction between retirement flexibility and portfolio choice in an overlapping-generations model of a closed economy. Retirement flexibility is often seen as a hedge against capital market risks which justifies more risky asset portfolios. We show, however, that this positive relationship between risk taking and retirement flexibility is weakened – and under some conditions even turned around – if not only capital market risks but also productivity risks are considered. Productivity risk in combination with a high elasticity of substitution between consumption and leisure creates a positive correlation between asset returns and labour income, reducing the willingness of consumers to bear risk. Moreover, it turns out that general equilibrium effects can either increase or decrease the equity exposure, depending on the degree of substitutability between consumption and leisure.

Keywords: portfolio choice, retirement (in)flexibility, productivity and depreciation risk, intratemporal substitution, general equilibrium

JEL Classification: E21, G11, J26

Suggested Citation

Adema, Yvonne and Bonenkamp, Jan and Meijdam, A.C. (Lex), Retirement Flexibility and Portfolio Choice in General Equilibrium (February 4, 2011). Tinbergen Institute Discussion Paper 11-038/DSF13, Available at SSRN: https://ssrn.com/abstract=1763670 or http://dx.doi.org/10.2139/ssrn.1763670

Yvonne Adema (Contact Author)

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

Jan Bonenkamp

CPB Netherlands Bureau of Economic Policy Research ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

A.C. (Lex) Meijdam

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 23 85 (Phone)
+31 13 466 30 42 (Fax)

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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