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 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 languageEnglish
Publication date2019
Number of pages52
Publication statusPublished - 2019
EventMidwest Finance Association 2019 Annual Meeting - Radisson Blu Aqua Hotel, Chicago, United States
Duration: 7 Mar 20199 Mar 2019
Conference number: 68
https://www.openconf.org/MidwestFinance2019/modules/request.php?module=oc_program&action=program.php&p=program

Conference

ConferenceMidwest Finance Association 2019 Annual Meeting
Number68
LocationRadisson Blu Aqua Hotel
CountryUnited States
CityChicago
Period07/03/201909/03/2019
Internet address

Keywords

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

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