Life-Cycle Risk-Taking with Personal Disaster Risk

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

doi:10.2139/ssrn.3996997

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Life-Cycle Risk-Taking with Personal Disaster Risk

ESRB: Working Paper Series 2021/132

50 Pages Posted: 30 Dec 2021

See all articles by Fabio C. Bagliano

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics; Center for Research on Pensions and Welfare Policies (CeRP); University of Turin - Collegio Carlo Alberto

Carolina Fugazza

University of Torino -Department of Economics ESOMAS; Center for Research on Pensions and Welfare Policies

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; CEPR; EGCI; Netspar

There are 2 versions of this paper

Date Written: December, 2021

Abstract

This paper examines households’ self-insurance in financial markets when a rare personal disaster, such as disability or long-term unemployment, may occur during working years. Personal disaster risk alters lifetime ex-ante investment choices, even if most workers will not experience a disaster. Uncertainty about the size of human capital losses, which characterizes rare disasters, results in lower risk-taking at the beginning of working life, and is crucial in order to match the observed age profiles of US investors from 1992 to 2016.

Keywords: beta distribution, disability risk, disaster risk, non-linear income process, portfolio choice, unemployment risk

JEL Classification: D15, E21, G11

Suggested Citation: Suggested Citation

Bagliano, Fabio C. and Fugazza, Carolina and Nicodano, Giovanna, Life-Cycle Risk-Taking with Personal Disaster Risk (December, 2021). ESRB: Working Paper Series 2021/132, Available at SSRN: https://ssrn.com/abstract=3996997 or http://dx.doi.org/10.2139/ssrn.3996997