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Hedging Labor Income Risk

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Author Info

  • Betermier, Sebastien

    ()
    (The Desautels Faculty of Management)

  • Jansson, Thomas

    ()
    (Research Department, Central Bank of Sweden)

  • Parlour, Christine A.

    ()
    (The Haas School of Business)

  • Walden, Johan

    ()
    (The Haas School of Business)

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    Abstract

    We use a detailed panel data set of Swedish households to investigate the relation between their labor income risk and financial investment decisions. In particular, we relate changes in wage volatility to changes in the portfolio holdings for households that switched industries between 1999 and 2002. We find that households do adjust their portfolio holdings when switching jobs, which is consistent with the idea that households hedge their human capital risk in the stock market. The results are statis- tically and economically significant. A household going from an industry with low wage volatility to one with high volatility will ceteris paribus decrease its portfolio share of risky assets by up to 35%, or USD 15,575.

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    Bibliographic Info

    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 255.

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    Length: 52 pages
    Date of creation: 01 Nov 2011
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0255

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    Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
    Phone: 08 - 787 00 00
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    Keywords: investment decisions; hedging; human capital;

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    References

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    1. Hanno Lustig & Stijn Van Nieuwerburgh, 2005. "The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street," NBER Working Papers 11564, National Bureau of Economic Research, Inc.
    2. Georgarakos, Dimitris & Pasini, Giacomo, 2009. "Trust, sociability and stock market participation," CFS Working Paper Series 2009/29, Center for Financial Studies (CFS).
    3. John Y. Campbell & Martin Feldstein, 2001. "Introduction to "Risk Aspects of Investment-Based Social Security Reform"," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 1-10 National Bureau of Economic Research, Inc.
    4. Massa, Massimo & Simonov, Andrei, 2004. "Hedging, Familiarity and Portfolio Choice," SIFR Research Report Series 21, Institute for Financial Research.
    5. John Y. Campbell & Martin Feldstein, 2001. "Risk Aspects of Investment-Based Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number camp01-1, July.
    6. John Y. Campbell, 1995. "Understanding Risk and Return," Harvard Institute of Economic Research Working Papers 1711, Harvard - Institute of Economic Research.
    7. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2008. "Fight or Flight? Portfolio Rebalancing by Individual Investors," NBER Working Papers 14177, National Bureau of Economic Research, Inc.
    8. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March.
    9. Jonathan Berk & Johan Walden, 2010. "Limited Capital Market Participation and Human Capital Risk," NBER Working Papers 15709, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers 8934, C.E.P.R. Discussion Papers.

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