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

  • 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)

Registered author(s):

    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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    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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    1. John Y. Campbell & João F. Cocco & Francisco J. Gomes & Pascal J. Maenhout, 2001. "Investing Retirement Wealth: A Life-Cycle Model," NBER Chapters, in: Risk Aspects of Investment-Based Social Security Reform, pages 439-482 National Bureau of Economic Research, Inc.
    2. Eugene F. Fama & Kenneth R. French, 2002. "The Equity Premium," Journal of Finance, American Finance Association, vol. 57(2), pages 637-659, 04.
    3. Campbell, John Y. & Nosbusch, Yves, 2007. "Intergenerational risksharing and equilibrium asset prices," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2251-2268, November.
    4. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
      • Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
    5. Edin, P.-A. & Fredriksson, P., 2000. "LINDA - Longitudinal INdividual DAta for Sweden," Papers 2000-19, Uppsala - Working Paper Series.
    6. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    7. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
    8. Robert J. Shiller, 2003. "Social Security and Individual Accounts as Elements of Overall Risk-Sharing," American Economic Review, American Economic Association, vol. 93(2), pages 343-347, May.
    9. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, 08.
    10. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
    11. Christopher D. Carroll & Andrew A. Samwick, 1995. "The Nature of Precautionary Wealth," NBER Working Papers 5193, National Bureau of Economic Research, Inc.
    12. Schieber, Sylvester J & Shoven, John B, 1996. "Social Security Reform: Around the World in 80 Ways," American Economic Review, American Economic Association, vol. 86(2), pages 373-77, May.
    13. Robert J. Shiller, 2005. "The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation," Cowles Foundation Discussion Papers 1504, Cowles Foundation for Research in Economics, Yale University.
    14. 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, vol. 56(5), pages 1629-1666, October.
    15. Carlsson, Evert & Erlandzon, Karl, 2005. "The Dark Side of Wage Indexed Pensions," Working Papers in Economics 178, University of Gothenburg, Department of Economics.
    16. Joao F. Cocco, 2005. "Portfolio Choice in the Presence of Housing," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 535-567.
    17. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
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