Hedging Recessions
Branger Nicole, Larsen Linda Sandris, Munk Claus
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.
Publication type
Research article (journal)
Peer reviewed
Yes
Publication status
Published
Year
2019
Journal
Journal of Economic Dynamics and Control
Volume
107
Language
English
ISSN
0165-1889
DOI