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

Author

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  • Mondher Bellalah

    (University of Cergy-Pontoise
    ISC Paris)

  • Yaosheng Xu

    (Cornell University)

  • Detao Zhang

    (Shandong University)

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.

Suggested Citation

  • Mondher Bellalah & Yaosheng Xu & Detao Zhang, 2019. "Intertemporal optimal portfolio choice based on labor income within shadow costs of incomplete information and short sales," Annals of Operations Research, Springer, vol. 281(1), pages 397-422, October.
    • Handle: RePEc:spr:annopr:v:281:y:2019:i:1:d:10.1007_s10479-018-2901-4
    DOI: 10.1007/s10479-018-2901-4
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    References listed on IDEAS

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    Cited by:

    1. Guodong Ding & Daniele Marazzina, 2021. "Effect of Labour Income on the Optimal Bankruptcy Problem," Papers 2106.15426, arXiv.org.
    2. E. Grizickas Sapkute & M. A. Sánchez-Granero & M. N. López García & J. E. Trinidad Segovia, 2022. "The impact of regulation-based constraints on portfolio selection: The Spanish case," Palgrave Communications, Palgrave Macmillan, vol. 9(1), pages 1-14, December.
    3. Mondher Bellalah & Xu Guo & Shuo Wu & Detao Zhang, 2022. "General equilibrium with heterogeneous participants and continuous consumption with information costs and short selling constraints," Annals of Operations Research, Springer, vol. 313(2), pages 713-732, June.

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    More about this item

    Keywords

    Optimal portfolio choice; Information cost; Short sales; Consumption; Labor income; Analytic hierarchy process;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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