Tarun Gupta
PhD Candidate, Department of Economics
University of Chicago
Life-Cycle Effects of Internal Habit Formation on Portfolio Choice and Consumption (Job Market Paper)
The presence of an internal habit, interpreted as a minimum acceptable lifestyle, has important consequences for portfolio choice of agents. The risk aversion of agents varies endogenously through the life cycle depending on evolution of the agent's habit. For the case where total wealth is capitalized, I obtain analytical solutions for the value and policy functions in a continuous time finite horizon model. There is an interesting life cycle effect which I highlight. Younger agents need to sustain their habits for a longer horizon, thereby making them more risk averse and inducing them to optimally hold more conservative portfolios, as compared to older agents who have fewer outstanding periods, hence worry less about sustaining future habits and hold more aggressive portfolios. The model is applied to study portfolio decisions of retired households, in contrast to the standard model it is able to explain the data.Effect of Tunneling on Asset Prices: Evidence from Indian Equity Markets (Work in progress, joint with Manuj Garg, Stanford)