Hedging Recessions

Research output: Contribution to journalJournal articleResearchpeer-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
Article number103715
JournalJournal of Economic Dynamics and Control
Volume107
Number of pages24
ISSN0165-1889
DOIs
Publication statusPublished - Oct 2019

Bibliographical note

Published online: 8. August 2019

Keywords

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

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