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Hedging Labor Income Risk

Author

Listed:
  • 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)

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.

Suggested Citation

  • Betermier, Sebastien & Jansson, Thomas & Parlour, Christine A. & Walden, Johan, 2011. "Hedging Labor Income Risk," Working Paper Series 255, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0255
    as

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    File URL: http://www.riksbank.com/upload/Dokument_riksbank/Kat_publicerat/WorkingPapers/2011/wp255.pdf
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    References listed on IDEAS

    as
    1. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2009. "Fight or Flight? Portfolio Rebalancing by Individual Investors," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 301-348.
    2. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-172, March.
    3. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    4. Dimitris Georgarakos & Giacomo Pasini, 2011. "Trust, Sociability, and Stock Market Participation," Review of Finance, European Finance Association, vol. 15(4), pages 693-725.
    5. 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.
    6. Jonathan Berk & Johan Walden, 2010. "Limited Capital Market Participation and Human Capital Risk," NBER Working Papers 15709, National Bureau of Economic Research, Inc.
    7. Massimo Massa & Andrei Simonov, 2006. "Hedging, Familiarity and Portfolio Choice," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 633-685.
    8. Hanno Lustig & Stijn Van Nieuwerburgh, 2008. "The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 2097-2137, September.
    9. Jean-Pierre Danthine & John B. Donaldson, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 41-64.
    10. 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, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, Elsevier.

    More about this item

    Keywords

    investment decisions; hedging; human capital;

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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