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Asian Review of Financial Research, Vol., No..
pp.810~858
pp.810~858
Endogenous Labor/Leisure/Investment Choice with Time Constraint and Asset Returns
Dong-Hyun Ahn School of Economics, Seoul National University
Sun-Joong Yoon KAIST Business School
We posit the time cost required for managing risky asset investment including conducting research and monitoring its performance. An economic agent, who should allocate a limited amount of time to labor, leisure and risky investment, is subject to the opportunity time cost, which is forgone labor or leisure. Our model investigates the change of the equity premium and volatility in the presence of such a time constraint. In particular, we derive the closed- form solutions for the risky asset returns, volatility, and risk-free rate in a simple equilibrium framework wherein agents have log utility. Our model is shown to yield the excess return and the volatility consistent with historical values observed in U.S. stock market even with a small amount of the time cost. In addition, we separate the impact of endogenous labor/leisure choice from the total changes on return dynamics by comparing with exogenous labor income case.
Dong-Hyun Ahn
Sun-Joong Yoon
We posit the time cost required for managing risky asset investment including conducting research and monitoring its performance. An economic agent, who should allocate a limited amount of time to labor, leisure and risky investment, is subject to the opportunity time cost, which is forgone labor or leisure. Our model investigates the change of the equity premium and volatility in the presence of such a time constraint. In particular, we derive the closed- form solutions for the risky asset returns, volatility, and risk-free rate in a simple equilibrium framework wherein agents have log utility. Our model is shown to yield the excess return and the volatility consistent with historical values observed in U.S. stock market even with a small amount of the time cost. In addition, we separate the impact of endogenous labor/leisure choice from the total changes on return dynamics by comparing with exogenous labor income case.
Time cost,Full income approach,Equity premium puzzle,Time allocation,Leisure-labor choice