BIG­FI/Fin­ance Sem­in­ar with Jonath­an A. Park­er, MIT Sloan School of Man­age­ment

Please join us for a BIGFI/Finance Seminar with Jonathan A. Parker, MIT Sloan School of Management.

Jonathan A. Parker will present: Simple Allocation Rules and Optimal Portfolio Choice Over the Lifecycle

Abstract: In many areas of economics, relatively simple models developed for insight are used as quantitative guides. We study the accuracy of such simple quantitative guidance in an area where it has been widely adopted — lifecycle portfolio choice among stocks, bonds, and liquid accounts — by developing a machine-learning algorithm to solve for optimal portfolio choice in a calibrated lifecycle model that includes many features of reality modelled only separately in previous work. Both for optimizing households and for households that under-save, the average fully-optimal portfolio at each age conforms well to current simple age-dependent prescriptive rules until shortly before retirement, validating existing analyses. We further show that the consumption-equivalent losses from conditioning portfolio shares on age alone are substantial, around 2 to 3 percent of consumption. Fully-optimal equity shares have substantial heterogeneity, particularly by wealth level, state of the business cycle, and dividend-price ratio, implying substantial gains to further customization in these dimensions.