Hedging Recessions

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

Traditional life-cycle models conclude that individuals should be fully invested in stocks when young -- in stark contrast to observed stock holdings -- and then gradually replace stocks with bonds as retirement is approaching. We show that a carefully specified and calibrated model of unemployment risk reduces the early-life stock holdings dramatically. The reduction is driven by the decline in current and expected future income caused by unemployment, the relatively high unemployment risk of young adults, and the business cycle variations in un- and reemployment probabilities that tend to deteriorate exactly when stocks perform poorly.
Original languageEnglish
Publication dateJun 2018
Number of pages45
DOIs
Publication statusPublished - Jun 2018
Event25th Annual Meeting of the German Finance Association. DGF 2018 - Universität Trier, Trier, Germany
Duration: 21 Sep 201822 Sep 2018
Conference number: 25
https://www.uni-trier.de/index.php?id=65393

Conference

Conference25th Annual Meeting of the German Finance Association. DGF 2018
Number25
LocationUniversität Trier
CountryGermany
CityTrier
Period21/09/201822/09/2018
Internet address

Keywords

  • Unemployment risk
  • Business cycle
  • Life-cycle model
  • Portfolio planning

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