Unemployment and Portfolio Choice: Does Persistence Matter?
AbstractWe use a life cycle model of consumption and portfolio choice to study the effects of social security on the investment decisions of households for the European case. Our model is mainly based on the one developed by Cocco, Gomes, and Maenhout (2005). We extend it by unemployment risk using Markov chains to model the transition between different employment states. In contrast to most models in the life cycle literature, our model allows for three different states, namely employment, short-term as well as long-term unemployment. This allows us to examine the effects of persistence in the unemployment process on portfolio choice. Our main findings are, first, that in case of short-term unemployment only, social security systems as those established in the EU are able to offset the negative impact of unemployment risk on the portfolio-share invested in risky assets. Second, the simulation results reveal that when allowing for long-term unemployment the equity-share is suppressed, especially for young investors. We show that this negative effect of unemployment is mainly driven by its persistence.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 978.
Length: 25 p.
Date of creation: 2010
Date of revision:
Precautionary savings; unemployment insurance; long-term unemployment; income uncertainty;
Other versions of this item:
- Franziska M. Bremus & Vladimir Kuzin, 2011. "Unemployment and Portfolio Choice: Does Persistence Matter?," IAW Discussion Papers, Institut fÃ¼r Angewandte Wirtschaftsforschung (IAW) 77, Institut fÃ¼r Angewandte Wirtschaftsforschung (IAW).
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-06 (All new papers)
- NEP-CMP-2010-03-06 (Computational Economics)
- NEP-DGE-2010-03-06 (Dynamic General Equilibrium)
- NEP-IAS-2010-03-06 (Insurance Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000.
"Consumption Over the Life-Cycle,"
CEPR Discussion Papers, C.E.P.R. Discussion Papers
2345, C.E.P.R. Discussion Papers.
- Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
- Christopher D. Carroll, 2005.
"The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems,"
NBER Technical Working Papers
0309, National Bureau of Economic Research, Inc.
- Carroll, Christopher D., 2006. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," Economics Letters, Elsevier, Elsevier, vol. 91(3), pages 312-320, June.
- Carroll, Christopher D., 2005. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," CFS Working Paper Series 2005/18, Center for Financial Studies (CFS).
- Christopher Carroll, 2005. "The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 520, The Johns Hopkins University,Department of Economics.
- Merton, Robert C., 1971.
"Optimum consumption and portfolio rules in a continuous-time model,"
Journal of Economic Theory, Elsevier,
Elsevier, vol. 3(4), pages 373-413, December.
- R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 58, Massachusetts Institute of Technology (MIT), Department of Economics.
- Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas H. Joines, 1999.
"Social Security in an Overlapping Generations Economy with Land,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 638-665, July.
- Ayse Imrohoroglu & Selahattin Imrohoroglu & Douglas Joines, 1999. "Code for Social Security in an Overlapping Generations Model with Land," Computer Codes imrohoroglu99, Review of Economic Dynamics.
- Carroll, Christopher D. & Samwick, Andrew A., 1997.
"The nature of precautionary wealth,"
Journal of Monetary Economics, Elsevier,
Elsevier, vol. 40(1), pages 41-71, September.
- Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, Springer, vol. 6(1), pages 83-114, June.
- Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio choice over the life-cycle when the stock and labor markets are cointegrated," Working Paper Series, Federal Reserve Bank of Chicago WP-07-11, Federal Reserve Bank of Chicago.
- Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio Choice over the Life-Cycle when the Stock and Labor Markets Are Cointegrated," Journal of Finance, American Finance Association, American Finance Association, vol. 62(5), pages 2123-2167, October.
- Elke Holst & Dean R. Lillard & Thomas A. DiPrete, 2001. "Proceedings of the 2000 Fourth International Conference of German Socio-Economic Panel Study Users (GSOEP 2000): Editorial Introduction," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 70(1), pages 5-6.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek).
If references are entirely missing, you can add them using this form.