Hu, Zhezhi (2018) Life-cycle decision making problems under uncertainty. PhD thesis, University of Warwick.

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Abstract

This thesis focuses on modelling and solving one of the fundamental financial problems for an individual investor | the life-cycle decision making problem. In particular, we study three kinds of life-cycle problems that focusing on various preferences of the investor such as bequest motive and ambiguity aversion by using different financial instruments.

The investment, consumption and saving decisions are affected by various uncertainties. We first investigate a life-cycle consumption and asset allocation problem introducing habit formation preferences and demand for term life insurance. We consider an investor who is ambiguity-averse about stock returns and model the problem in a robust optimization framework. Our main contribution is to develop a robust life-cycle consumption and asset allocation model and show its tractability when integrating investor's subjective preferences and uncertainties. The empirical study shows the important consequences of degree of ambiguity aversion on life-cycle decisions, especially on the stock allocation. We also investigate the relationship between term life insurance demand and investor's ambiguity aversion/habit formation preferences.

Then we study a life-cycle consumption and asset allocation problem incorporating labour income ambiguity, stock market predictability and analyse effects of the correlation between stock return and labour income on investor's life-cycle decisions. We model the ambiguity aversion about labour incomes using the robust optimization framework and show its importance in explaining the strong (retirement) saving motive observed in empirical data. The computational results (obtained under assumptions of stock return to be predicable or not) illustrate possible effect of stock market predictability on not only the stock allocation, but also the consumption and saving decisions. Finally, we focus on the investor's consumption and housing decisions over the life cycle. We assume that the investor needs to make consumption choices between nondurable/ durable goods as well as housing decisions. We introduce the letting decisions (given the homeownership) in the life-cycle model, along with renting and housing decisions.

The underlying life-cycle consumption and housing problem is formulated as a Markov decision process and solved by traditional dynamic programming method using a backward induction. We empirically show how letting choices are driven by investor's preferences (such as risk aversion, elasticity of intertemporal substitution, bequest motive and the housing weight in the consumption utility) and hence influence renting and owning decisions. The computational results illustrate that, by including letting decisions, our calibrated life-cycle model performs well in matching the empirical data in terms of life-cycle homeownership rate and investor's living space patterns.

Item Type:	Thesis (PhD)
Subjects:	H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HG Finance
Library of Congress Subject Headings (LCSH):	Decision making, Finance, Economics, Stock exchanges
Official Date:	September 2018
Dates:	Date Event September 2018 Published
Institution:	University of Warwick
Theses Department:	Warwick Business School
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Gulpinar, Nalan ; Gozluklu, Arie
Format of File:	pdf
Extent:	viii, 113 leaves:illustrations, charts
Language:	eng

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