The Impact of Health Risk on Dynamic Portfolio Choice over the Life Cycle

• Applicant: Professor Dr. Raimond Maurer
• Subject Area: Accounting and Finance
• Term: from 2014 to 2017
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 258464417

The goal of this project is to analyze the financial consequences of health risks on optimal savings and portfolio decisions of private investors within the context of a realistically calibrated life cycle model in discrete time. In this model, investors have access to capital and insurance markets; they decide on their labor supply as well as the age at which they claim social security retirement benefits. They have to do so in the face of longevity, capital market, and labor income risks as well as health risks. While the Finance literature, to a great extent, has neglected health risks so far, these risks influence investor behavior through the incurrence of health costs as well as through changes in the labor income process and the survival probabilities. Apart from the public social security system, households have two alternatives to protect themselves against the financial consequences of health risks. They may either build up financial wealth, which in turn requires an optimal allocation between available asset classes (e.g. stocks and fixed income instruments),or they may buy private insurance (health, long term care or private pensions). The life cycle model we plan to develop and calibrate allows an analysis of the interdependencies between the different decisions and risk categories, closing an substantial gap in the literature. Furthermore, since private and public sector social security institutions are in the process of reform, the results of this project are relevant for both social and economic policy.

• DFG Programme: Research Grants