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Hedging recessions

Author

Listed:
  • 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.

Suggested Citation

  • Branger, Nicole & Larsen, Linda Sandris & Munk, Claus, 2019. "Hedging recessions," Journal of Economic Dynamics and Control, Elsevier, vol. 107(C), pages 1-1.
    • Handle: RePEc:eee:dyncon:v:107:y:2019:i:c:2
    DOI: 10.1016/j.jedc.2019.07.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Unemployment risk; Business cycle; Life-cycle model; Portfolio planning;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving

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