Title
Solution Guide for Incomplete Markets Life-Cycle Policies with Stochastic Income
Abstract
This paper serves as a solution guide for incomplete markets life-cycle policies (consumption/savings, investment, retirement) with stochastic income. The unspanned income risk sources stem from both Brownian motions and large, negative jump shocks. The solution guide allows a borrowing-constrained representative agent with unspanned income to maximize recursive utility over infinite horizon by allocating her wealth between multiple risky stocks and a risk-free bond, while also determining the optimal time to retire. The associated Bellman equation can be explicitly solved up to a solution of integral equation, where many analytical properties of the solution are obtained. We then show various applications of the approach for incomplete markets problems, including existing life-cycle models with labor income.
Bio
Seyoung Park is Associate Professor of Finance at University of Nottingham. His research focuses on portfolio theory, asset pricing, and their applications to pension, insurance, and retirement. His work has been published in journals including Operations Research, Mathematics of Operations Research, Journal of Risk and Insurance, and Economic Theory. He holds a PhD in Investment and Risk Management from POSTECH (South Korea). He served as Postdoctoral Research Associate for Risk Management Institute at National University of Singapore. He also worked at Loughborough University as Assistant Professor of Finance.