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Intergenerational risk trading and the innovative role of equity-wage swaps

Author

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  • Jiajia, C.
  • Ponds, Eduard

    (Tilburg University, School of Economics and Management)

Abstract

From a life cycle theory perspective, both young and old individuals may gain from a reallocation of equity and wage risk exposure between each other. However, current financial markets do not offer wage growth-linked securities and borrowing against labor income without collateral is difficult. To improve intergenerational risk reallocation, we propose a market-based voluntary risk trading arrangement between coexisting generations via an innovative swap market where participants trade equity-related returns for wage-linked returns, and vice versa. The maturity of the swap contract is restricted to one year to address the collateral issue. We find there is always a market for equity–wage swaps and the market-clearing premium will vary depending on multiple state variables (economy, demographics, and human and financial capital). This innovative swap market is effective at improving the welfare of all generations because the trading of wagelinked returns leads to a more complete market, enabling individuals to realize a more preferred risk exposure over their life cycles.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jiajia, C. & Ponds, Eduard, 2016. "Intergenerational risk trading and the innovative role of equity-wage swaps," Other publications TiSEM ee4d0187-c566-4a78-99bb-4, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:ee4d0187-c566-4a78-99bb-4503d8bfcd2c
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    References listed on IDEAS

    as
    1. 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, vol. 62(5), pages 2123-2167, October.
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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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