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Labor Income and Risky Assets under Market Incompleteness: Evidence from Italian Data

  • Giuseppe Grande

    ()

    (Banca d�Italia, Research Department)

  • Luigi Ventura

    (Universita' di Roma "La Sapienza", Department of Economics)

Theory suggests that uninsurable income risk induces individuals to accumulate assets as a precautionary reserve of value. Most assets, however, bear rate of return risk, that can be diversified only if every asset is traded by a large number of individuals and arbitrage is frictionless. Using Italian micro-data, we find evidence of income and asset risks that affect consumption. Italian households are particularly well insured against illness but not against job losses. Moreover, we detect a positive, yet weak, effect of asset holding on the variability of consumption streams across households.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 399.

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Date of creation: Mar 2001
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Handle: RePEc:bdi:wptemi:td_399_01
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