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Eliciting earnings risk from labor and capital income

  • Sarah Meyer

    (University of Münster)

  • Mark Trede

    (University of Münster)

Earnings risk is an inherently subjective concept. Observing volatile earnings paths does not necessarily imply that the perceived earnings risk is large. If a drastic change in earnings is known well in advance, there is no additional risk involved. Individuals are likely to have more information about their earnings prospects than the observing econometrician. Since it is the subjectively perceived earnings risk that in uences economic decisions like consumption, we need to develop methods that allow to elicit the perceived risk from observable variables. This paper suggests an estimation method based on variables that are not only observable in principle, but can be observed in fact in many panel data sets.

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File URL: http://www.norface-migration.org/publ_uploads/NDP_39_12.pdf
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Paper provided by Norface Research Programme on Migration, Department of Economics, University College London in its series Norface Discussion Paper Series with number 2012039.

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Date of creation: Nov 2012
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Handle: RePEc:nor:wpaper:2012039
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  1. Luis M. Viceira, 1999. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," NBER Working Papers 7409, National Bureau of Economic Research, Inc.
  2. Fatih Guvenen & Anthony Smith, 2010. "Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach," NBER Working Papers 16327, National Bureau of Economic Research, Inc.
  3. Gourieroux, C. & Monfort, A. & Renault, E., 1992. "Indirect Inference," Papers 92.279, Toulouse - GREMAQ.
  4. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  5. Giucca, P. & Jappelli, T. & Terlizzese, D., 1992. "Earning Uncertainty and Precautionary Saving," Papers 161, Banca Italia - Servizio di Studi.
  6. Christopher Carroll, 2004. "Theoretical Foundations of Buffer Stock Saving," NBER Working Papers 10867, National Bureau of Economic Research, Inc.
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