Longevity-linked assets and pre-retirement consumption/portfolio decisions |
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Institution: | 1. Department of Accounting, Finance and Economics, Griffith University, 170 Kessels Road, Nathan, QLD 4111, Australia;2. School of Economics and Finance, Queensland University of Technology, Brisbane, Australia |
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Abstract: | We solve the consumption/investment problem of an agent facing a stochastic mortality intensity. The investment set includes a longevity-linked asset, as a derivative on the force of mortality. In a complete and frictionless market, we derive a closed form solution when the agent has Hyperbolic Absolute Risk Aversion preferences and a fixed financial horizon. Our calibrated numerical analysis on US data shows that individuals optimally invest a large fraction of their wealth in longevity-linked assets in the pre-retirement phase, because of their need to hedge against stochastic fluctuations in their remaining life-time at retirement. |
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Keywords: | Longevity risk Pre-retirement savings Portfolio choice HARA preferences Longevity-linked asset Stochastic mortality |
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