Unemployment Risks and Optimal Retirement in an Incomplete Market

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

5 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)1015-1032
Journal / PublicationOperations Research
Volume64
Issue number4
Early online date20 Jun 2016
Publication statusPublished - Jul 2016

Abstract

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.

Research Area(s)

  • dynamic programming/optimal control, investment, stochastic model applications

Citation Format(s)

Unemployment Risks and Optimal Retirement in an Incomplete Market. / Bensoussan, Alain; Jang, Bong-Gyu; Park, Seyoung.

In: Operations Research, Vol. 64, No. 4, 07.2016, p. 1015-1032.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review