Dynamic asset allocation when bequests are luxury goods

Jie Ding, Geoffrey Kingston*, Sachi Purcal

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

10 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)65-71
Number of pages7
JournalJournal of Economic Dynamics and Control
Volume38
DOIs
Publication statusPublished - Jan 2014

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