A1003
Title: Income-based optimal portfolio choice: A new analysis
Authors: Alain Bensoussan - University of Texas at Dallas (United States)
Seyoung Park - University of Nottingham (United Kingdom) [presenting]
Abstract: A new income-based optimal portfolio choice framework is developed. The new state variable and the new risk control representing, respectively, total wealth (financial wealth plus human capital) and the total risk exposure of total wealth to both the stock and labor markets are introduced. In particular, total wealth plays an important direct input variable in the agent's optimal risk control. A certain threshold of wealth is found below which the agent's risk-taking decreases as unspanned income risk increases, and above which the risk-taking rises as the unspanned risk increases. A general-equilibrium analysis demonstrates that the market volatility pattern inherits the agent's different risk-taking behaviors over levels of wealth, so the increased volatility occurs as a rational response to the agent's aggressive bidding for the total risk exposure to both the stock and labor markets when wealth is large.
