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The Bright Side of Shiller-Swaps: A Solution to Inter-generational Risk-sharing

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Author Info

  • Carlsson, Evert

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Erlandzon, Karl

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

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    Abstract

    This paper investigates the diversification demand of an agent, who is faced with the alternative to swap aggregate labour-income risk for equity-exposure, through her individual account in a mandatory-pension scheme. The framework for the analysis is a life-cycle model of a borrowing-constrained individual´s consumption- and portfolio-choice in the presence of uncertain labour-income and realistically calibrated tax- and pension systems. Pension benefits stem from both defined benefit and notionally defined contributions part, the latter being indexed to stochastic aggregate labour-income. We show that agents, depending on age and swap premium, agents will be either buyers or sellers of such a swap, and that inter-generational risk sharing can therefore be achieved.

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    File URL: http://hdl.handle.net/2077/2683
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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 233.

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    Length: 23 pages
    Date of creation: 21 Jul 2006
    Date of revision: 24 Oct 2006
    Handle: RePEc:hhs:gunwpe:0233

    Contact details of provider:
    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/
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    Related research

    Keywords: Life-cycle; portfolio choice; pensions; Shiller-swap;

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    References

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    1. 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.
    2. James Claus, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 56(5), pages 1629-1666, October.
    3. Edin, P.-A. & Fredriksson, P., 2000. "LINDA - Longitudinal INdividual DAta for Sweden," Papers, Uppsala - Working Paper Series 2000-19, Uppsala - Working Paper Series.
    4. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, American Finance Association, vol. 57(2), pages 637-659, 04.
    5. John Y. Campbell & Yves Nosbusch, 2006. "Intergenerational Risksharing and Equilibrium Asset Prices," NBER Working Papers 12204, National Bureau of Economic Research, Inc.
    6. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, Econometric Society, vol. 59(5), pages 1221-48, September.
    7. Schieber, Sylvester J & Shoven, John B, 1996. "Social Security Reform: Around the World in 80 Ways," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 373-77, May.
    8. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc.
    9. Christopher D Carroll, 1990. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
    10. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1504, Cowles Foundation for Research in Economics, Yale University.
    11. John Y. Campbell & Joao F. Cocco & Francisco J. Gomes & Pascal J. Maenhout, 1999. "Investing Retirement Wealth: A Life-Cycle Model," NBER Working Papers 7029, National Bureau of Economic Research, Inc.
    12. 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.
    13. 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.
    14. Robert J. Shiller, 2003. "Social Security and Individual Accounts as Elements of Overall Risk-Sharing," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 343-347, May.
    15. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
    16. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
    17. Carlsson, Evert & Erlandzon, Karl, 2005. "The Dark Side of Wage Indexed Pensions," Working Papers in Economics, University of Gothenburg, Department of Economics 178, University of Gothenburg, Department of Economics.
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    Cited by:
    1. Gabay, Daniel & Grasselli, Martino, 2012. "Fair demographic risk sharing in defined contribution pension systems," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(4), pages 657-669.

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