Article

Investment time horizon and asset allocation models

Financial Markets and Portfolio Management 02/2001; 15(1):76-93. DOI: 10.1007/s11408-001-0106-2
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    ABSTRACT: In comparing an immediate life annuity with a payout-equivalent investment fund payout plan (self-annuitization), research to date has focused mainly on shortfall probabilities of self-annuitization. As an exception, Schmeiser and Post (2005) propose a family strategy where the chances of self-annuitization (i.e., bequests) are taken into consideration as well. In such a family strategy, potential heirs must bear shortfall risks, but in return have a chance of receiving a bequest. This paper analyzes under which conditions heirs will be willing to agree to a family strategy. The idea of a family strategy is integrated into a realistically calibrated intertemporal expected utility framework, taking into account risks arising from stochastic life span, asset returns, and nontradable labor income. A family strategy is shown to be accepted for many parameter combinations, especially in families with low marginal tax rates, if the heirs are wealthy, or in a case where the retiree has an average population life expectancy. We also work out how family self-annuitization decisions interact with asset allocation, saving decisions, and labor income risk. Under realistic conditions our results support two explanations for the empirically observable low demand for annuities (the so-called annuity puzzle), namely intra-family risk sharing and high cost of market-annuitization.
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    ABSTRACT: In the last decades, the trend to globalization has been intensifying. The thereby increased interdependence between national economies translates into a higher covariance of traded assets and thus leads to a loss of diversification gains. The methodology of HESTON and ROU-WENHORST is used to split the returns of G7 and Swiss stocks into a common, a sector, and a country component. The findings show that country diversification has been better in the last two decades. Nevertheless, a strong increase in the gains provided by sector diversification - mainly induced by the IT sector - can be observed in recent years.
    Financial Markets and Portfolio Management 05/2002; 16(2):234-253.

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