Financial planning for young households

We analyze the financial planning problems of young households whose main decisions are how to finance the purchase of a house (liabilities) and how to allocate investments in pension savings schemes (assets). The problems are solved using a multi‐stage stochastic programming model where the uncertainty is described by a scenario tree generated from a vector auto‐regressive process for equity returns and interest rate evolution. We find strong evidence of the importance of taking into account the multi‐stage nature of the problem, as well as the need to consider the asset and liability sides jointly.