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Hedging Labor Income Risk

  • 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)

Registered author(s):

    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.

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    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 255.

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    Length: 52 pages
    Date of creation: 01 Nov 2011
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0255
    Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
    Phone: 08 - 787 00 00
    Fax: 08-21 05 31
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    1. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
    2. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    3. Massa, Massimo & Simonov, Andrei, 2004. "Hedging, Familiarity and Portfolio Choice," CEPR Discussion Papers 4789, C.E.P.R. Discussion Papers.
    4. 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, July.
    5. Laurent E. Calvet & John Y. Campbell & Paolo Sodini, 2008. "Fight or Flight? Portfolio Rebalancing by Individual Investors," NBER Working Papers 14177, National Bureau of Economic Research, Inc.
    6. 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.
    7. Dimitris Georgarakos & Giacomo Pasini, 2011. "Trust, Sociability, and Stock Market Participation," Review of Finance, European Finance Association, vol. 15(4), pages 693-725.
    8. Jonathan Berk & Johan Walden, 2010. "Limited Capital Market Participation and Human Capital Risk," NBER Working Papers 15709, National Bureau of Economic Research, Inc.
    9. 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.
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