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 earlylife 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.
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 earlylife 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 language | English |
|---|---|
| Publication date | 2019 |
| Number of pages | 52 |
| Publication status | Published - 2019 |
| Event | Midwest Finance Association 2019 Annual Meeting - Radisson Blu Aqua Hotel, Chicago, United States Duration: 7 Mar 2019 → 9 Mar 2019 Conference number: 68 https://www.openconf.org/MidwestFinance2019/modules/request.php?module=oc_program&action=program.php&p=program |
Conference
| Conference | Midwest Finance Association 2019 Annual Meeting |
|---|---|
| Number | 68 |
| Location | Radisson Blu Aqua Hotel |
| Country/Territory | United States |
| City | Chicago |
| Period | 07/03/2019 → 09/03/2019 |
| Internet address |
Keywords
- Unemployment risk
- Business cycle
- Life-cycle model
- Portfolio planning
