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International diversification and industry-related labor income risk

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  • Carolina Fugazza
  • Maela Giofre
  • Giovanna Nicodano

Abstract

Do equity markets help diversifying away industry-related labor income risk? This paper reconsiders the hedging role of stock markets by focusing on international equity diversification, rather than domestic asset allocation, and on industry wage, rather than individual labor income. We test for differences in implied equilibrium equity portfolios across investors belonging to different industry-country pairs. We compare these industry-based portfolio holdings to the one that is optimal for an investor endowed with the average home-country labor income. Our results resurrect the role of equities in hedging wage risk by uncovering remarkable heterogeneity across industries within each investing country. Our analysis also delivers insights concerning the role of occupational pension funds in designing optimal portfolios for their members.

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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 192.

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Length: 36 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:cca:wpaper:192

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Keywords: optimal portfolio choice; international diversification; labor income risk; industry-specific human capital; occupational pension funds;

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References

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Citations

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Cited by:
  1. Cong S. Pham & Mary E. Lovely & Devashish Mitra, 2009. "The Home-Market Effect and Bilateral Trade Patterns: A Reexamination of the Evidence," Economics Series 2009_12, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  2. Giofré, Maela, 2013. "International diversification: Households versus institutional investors," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 145-176.
  3. Massimo Guidolin & Stuart Hyde, 2012. "Optimal Portfolios for Occupational Funds under Time-Varying Correlations in Bull and Bear Markets? Assessing the Ex-Post Economic Value," Working Papers 455, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Esther Eiling, 2013. "Industry-Specific Human Capital, Idiosyncratic Risk, and the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 68(1), pages 43-84, 02.

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