Journal articles

Recent publications and highlights

How do interest-only mortgages affect consumption and saving over the life cycle? 

Management Science, 70(3), 1970-1991, 2024. With Linda Sandris Larsen, Rikke Sejer Nielsen, Jesper Rangvid. 

Using a unique Danish data set, we show that young and old households are more likely to use IO mortgages compared to middle-aged households. Young households use IO mortgages because they expect higher future income, old households because IO mortgages allow them to circumvent an otherwise binding liquidity constraint. We also examine how households with IO mortgages differ from households with repayment mortgages in terms of leverage, debt and asset composition, and pension contributions.

The design and welfare implications of mandatory pension plans 

Journal of Financial and Quantitative Analysis,  58(8): 3420-3449, 2023. With Linda Sandris Larsen. 

In a rich life-cycle model, we show that well-designed mandatory pension plans significantly improve the welfare of individuals procrastinating on savings, and even improve most rational individuals' welfare through a return tax advantage and fair annuitization. For a group of heterogeneous savers, in terms of preferences and sophistication, the best plan has contributions of 10% of income from age 30, a glidepath investment strategy, payouts following a variable lifelong annuity, and various option features. This plan generates an average welfare gain of $175,000 per individual.


Bequest motives in consumption-portfolio problems with recursive utility 

Journal of Banking and Finance, 138, article no. 106428, 2022. With Holger Kraft, Farina Weiss

We show that the standard representation of the bequest motive in finite-horizon, recursive utility maximization problems leads to perverse results, and we introduce a superior representation. Numerical examples illustrate the pitfalls using the traditional specification and clarifies how the bequest preference affects optimal decisions and the life-cycle patterns of consumption and wealth. We show that the typical utility representation for a unit EIS actually assumes a strong bequest preference. 

Housing habits and their implications for life-cycle consumption and investment 

Review of Finance, 22(5): 1737-1762, 2018 (Internet Appendix). With Holger Kraft, Sebastian Wagner. 

Habit formation for housing consumption explains why young households invest little in stocks, why the housing expenditure share is age- and wealth-dependent, why non-housing consumption is more sensitive to wealth and income shocks than housing consumption, and why non-housing consumption is hump-shaped over life. 

Options in compensation: Promises and pitfalls

Journal of Accounting Research, 52(3): 703-732, 2014. With Christian Riis Flor, Hans Frimor. 

A compensation package of stocks and options can be near-optimal in providing incentives for both effort and risky investments. Capping pay can be important to avoid excessively risky investments.

Solving constrained consumption-investment problems by simulation of artificial market strategies

Management Science, 59(2): 485-503, 2013 (Online Appendix). With Björn Bick, Holger Kraft.

New efficient numerical method for life-cycle consumption-portfolio problems. Combines the abstract idea of artificial markets (Cvitanic-Karatzas), closed-form solutions in affine or quadratic models, straightforward Monte Carlo simulation, and a standard iterative optimization routine. Upper bound on numerical error.

Dynamic asset allocation with stochastic income and interest rates

Journal of Financial Economics, 96(3): 433-462, 2010. With Carsten Sørensen.

Labor income growth varies over the business cycle and thus with the interest rate level. The slope of this relation is crucial for optimal stock/bond/cash allocation through life. PSID data show substantial variation across individuals in this slope. 

Other articles

Articles in Danish