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Eliciting earnings risk from labor and capital income

Author

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  • Sarah Meyer

    (University of Münster)

  • Mark Trede

    (University of Münster)

Abstract

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.

Suggested Citation

  • Sarah Meyer & Mark Trede, 2012. "Eliciting earnings risk from labor and capital income," Norface Discussion Paper Series 2012039, Norface Research Programme on Migration, Department of Economics, University College London.
  • Handle: RePEc:nor:wpaper:2012039
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    References listed on IDEAS

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    1. Tony Smith & M. Fatih Guvenen, 2007. "Inferring Labor Income Risk from Economic Choices: An Indirect Inference Approach," 2007 Meeting Papers 1024, Society for Economic Dynamics.
    2. Christopher D. Carroll, 2004. "Theoretical Foundations of Buffer Stock Saving," Economics Working Paper Archive 517, The Johns Hopkins University,Department of Economics.
    3. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings uncertainty and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 307-337, November.
    4. Luis M. Viceira, 2001. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," Journal of Finance, American Finance Association, vol. 56(2), pages 433-470, April.
    5. Gourieroux, C & Monfort, A & Renault, E, 1993. "Indirect Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages 85-118, Suppl. De.
    6. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters,in: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472 World Scientific Publishing Co. Pte. Ltd..
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