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Precautionary saving and changes in risk correlation

Author

Listed:
  • Marco Magnani

    (Dipartimento di Economia, Università di Parma)

  • Mario Menegatti

    (Dipartimento di Economia, Università di Parma)

Abstract

This note analyzes the effect of a change in the covariance between labor income risk and interest rate risk on the threshold level for prudence ensuring positive precautionary saving, recently derived by Baiardi, Magnani and Menegatti (2014). We show that this effect is different in different cases. An increase in the covariance between the two risks decreases (increases) the threshold level when the variance of labor income is smaller (larger) than the variance of the return on saving. An interpretation of these results in terms of elasticity of total variance with respect to saving is provided.

Suggested Citation

  • Marco Magnani & Mario Menegatti, 2015. "Precautionary saving and changes in risk correlation," Economics Bulletin, AccessEcon, vol. 35(1), pages 561-570.
    • Handle: RePEc:ebl:ecbull:eb-14-01050
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    References listed on IDEAS

    as
    1. Donatella Baiardi & Marco Magnani & Mario Menegatti, 2014. "Precautionary saving under many risks," Journal of Economics, Springer, vol. 113(3), pages 211-228, November.
    2. Hayne E. Leland, 1968. "Saving and Uncertainty: The Precautionary Demand for Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 82(3), pages 465-473.
    3. Jingyuan Li, 2012. "Precautionary saving in the presence of labor income and interest rate risks," Journal of Economics, Springer, vol. 106(3), pages 251-266, July.
    4. M. Menegatti, 2007. "A new interpretation for the precautionary saving motive: a note," Journal of Economics, Springer, vol. 92(3), pages 275-280, December.
    5. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, vol. 96(1), pages 280-289, March.
    6. Michel Denuit & Louis Eeckhoudt & Mario Menegatti, 2011. "Correlated risks, bivariate utility and optimal choices," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(1), pages 39-54, January.
    7. Choi, Gyemyung & Kim, Iltae & Snow, Arthur, 2001. "Comparative Statics Predictions for Changes in Uncertainty in the Portfolio and Savings Problems," Bulletin of Economic Research, Wiley Blackwell, vol. 53(1), pages 61-72, January.
    8. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(3), pages 353-360.
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    Citations

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    Cited by:

    1. Georgescu, Irina & Kinnunen, Jani, 2020. "The interest rate for saving as a possibilistic risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 547(C).
    2. Marco Magnani, 2017. "A new interpretation of the condition for precautionary saving in the presence of an interest-rate risk," Journal of Economics, Springer, vol. 120(1), pages 79-87, January.
    3. Christophe Courbage & Richard Peter & Béatrice Rey, 2022. "Incentive and welfare effects of correlated returns," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(1), pages 5-34, March.

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    More about this item

    Keywords

    Precautionary saving; labor income risk; interest rate risk; prudence; risk covariance;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D1 - Microeconomics - - Household Behavior

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