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Retirement with risk aversion change and borrowing constraints

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  • Jang, Bong-Gyu
  • Lee, Ho-Seok

Abstract

We quantify how an economic agent’s risk aversion change at retirement and borrowing constraints affect her optimal consumption, portfolio, and retirement decision. Numerical results with a reasonable parameter set imply that increase in an economic agent’s relative risk aversion at retirement, strong pre-retirement borrowing constraints, alone or together, can reduce the amount of wealth that must be accumulated to allow retirement. The numerical results also say that increase in an economic agent’s relative risk aversion at retirement, decrease in pre-retirement borrowing constraints, or both, can increase the consumption drop at retirement. We also display analytical results for some extreme cases.

Suggested Citation

  • Jang, Bong-Gyu & Lee, Ho-Seok, 2016. "Retirement with risk aversion change and borrowing constraints," Finance Research Letters, Elsevier, vol. 16(C), pages 112-124.
    • Handle: RePEc:eee:finlet:v:16:y:2016:i:c:p:112-124
    DOI: 10.1016/j.frl.2015.10.003
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    References listed on IDEAS

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    Cited by:

    1. Ho-Seok Lee, 2021. "Life Insurance and Subsistence Consumption with an Exponential Utility," Mathematics, MDPI, vol. 9(4), pages 1-10, February.

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    More about this item

    Keywords

    Optimal consumption; Portfolio selection; Retirement; Risk aversion change; Borrowing constraints;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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