Unemployment and Portfolio Choice: Does Persistence Matter?
AbstractHouseholds can rely on private savings or on public unemployment insurance to hedge against the risk of becoming unemployed. These hedging mechanisms are used differently across countries. In this paper, we use a life cycle model to study the effects of unemployment on the portfolio choice of households in the US and in Germany. We distinguish short- and long-term unemployment and find that, in case of short-term unemployment, unemployment insurance offsets the negative impact of unemployment risk on households’ equity holdings. When incorporating long-term unemployment, the US-equity share drops. This negative effect of unemployment is mainly driven by its high expected duration. In Germany, however, long-term unemployment does not significantly alter portfolio decisions. We show that different responses of portfolios to unemployment risk can be attributed to both differences in social security payments and different age-income profiles.
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Bibliographic InfoPaper provided by Institut für Angewandte Wirtschaftsforschung (IAW) in its series IAW Discussion Papers with number 77.
Length: 53 pages
Date of creation: Nov 2011
Date of revision:
long-term unemployment; social security; precautionary savings labor market institutions; employment adjustment;
Other versions of this item:
- Vladimir Kuzin & Franziska Bremus, 2010. "Unemployment and Portfolio Choice: Does Persistence Matter?," Discussion Papers of DIW Berlin 978, DIW Berlin, German Institute for Economic Research.
- 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
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