Unemployment Risks and Optimal Retirement in an Incomplete Market
We develop a new approach for solving the optimal retirement problem for an individual with an unhedgeable income risk. The income risk stems from a forced unemployment event, which occurs as an exponentially distributed random shock. The optimal retirement problem is to determine an individual’s op...
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| Veröffentlicht in: | Operations research 2016-07, Vol.64 (4), p.1015-1032 |
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| container_title | Operations research |
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| creator | Bensoussan, Alain Jang, Bong-Gyu Park, Seyoung |
| description | We develop a new approach for solving the optimal retirement problem for an individual with an unhedgeable income risk. The income risk stems from a forced unemployment event, which occurs as an exponentially distributed random shock. The optimal retirement problem is to determine an individual’s optimal consumption and investment behaviors and optimal retirement time simultaneously. We introduce a new convex-duality approach for reformulating the original retirement problem and provide an iterative numerical method to solve it. Reasonably calibrated parameters say that our model can give an explanation for lower consumption and risky investment behaviors of individuals, and for relatively higher stock holdings of the poor. We also analyze the sensitivity of an individual’s optimal behavior in changing her wealth level, investment opportunity, and the magnitude of preference for postretirement leisure. Finally, we find that our model explains a countercyclical pattern of the number of unemployed job leavers. |
| doi_str_mv | 10.1287/opre.2016.1503 |
| format | Article |
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The income risk stems from a forced unemployment event, which occurs as an exponentially distributed random shock. The optimal retirement problem is to determine an individual’s optimal consumption and investment behaviors and optimal retirement time simultaneously. We introduce a new convex-duality approach for reformulating the original retirement problem and provide an iterative numerical method to solve it. Reasonably calibrated parameters say that our model can give an explanation for lower consumption and risky investment behaviors of individuals, and for relatively higher stock holdings of the poor. We also analyze the sensitivity of an individual’s optimal behavior in changing her wealth level, investment opportunity, and the magnitude of preference for postretirement leisure. 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| ispartof | Operations research, 2016-07, Vol.64 (4), p.1015-1032 |
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| language | eng |
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| source | INFORMS PubsOnLine; Business Source Complete; Jstor Complete Legacy |
| subjects | Analysis Consumption Dynamic programming dynamic programming/optimal control Forecasts and trends Income investment Investment plans Investment strategy Iterative methods Learning models (Stochastic processes) Methods Numerical methods Operations research Preferences Problem solving Retirement Retirement planning Singapore stochastic model applications Unemployment |
| title | Unemployment Risks and Optimal Retirement in an Incomplete Market |
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