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Life-cycle risk-taking with personal disaster risk

Author

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  • Bagliano, Fabio C.
  • Fugazza, Carolina
  • Nicodano, Giovanna

Abstract

Inspired by a growing body of empirical work, this paper models a non-linear labor income process allowing for a personal disaster, such as long-term unemployment or disability, during working years. Such a disaster entails an uncertain but potentially large permanent shock to earnings. Personal disaster risk allows to match moderate risk-taking of young investors and a flat investment profile in age, observed in the United States, when the calibration of both the disaster probability and the expected permanent loss in the disaster state is conservative.

Suggested Citation

  • Bagliano, Fabio C. & Fugazza, Carolina & Nicodano, Giovanna, 2024. "Life-cycle risk-taking with personal disaster risk," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 378-396.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pb:p:378-396
    DOI: 10.1016/j.iref.2023.10.035
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    More about this item

    Keywords

    Life-cycle portfolio choice; Disaster risk; Beta distribution; Non-linear income process; Unemployment risk; Disability risk;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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