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Raffaele Corvino (Università di Torino)

20 May 2019 @ 12:45 - 13:45


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20 May 2019
12:45 - 13:45
Event Category:
Academic Events

“Hedging Labor Income Risk over the Life-Cycle”

Abstract: We show that the decision to participate in the stock market depends on the ability of equities to hedge the individual permanent earnings shocks, consistent with implications of life-cycle models. Those households who refrain from stock investing display positive correlation between their own permanent income innovations and market returns. These results owe to a two-step empirical strategy. First, a minimum distance estimation disentangles the aggregate from the idiosyncratic permanent component of labor income risks. The second step reconstructs the individual life-cycle dynamics of persistent shocks through a Kalman filter applied to the estimated labor income process. We are thus able to obtain the full cross-sectional distribution of individual correlations between permanent shocks and market returns.