The Bright Side of Shiller-Swaps: A Solution to Inter-generational Risk-sharing

Evert Carlsson () and Karl Erlandzon ()
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Evert Carlsson: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG
Karl Erlandzon: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG

No 233, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: This paper investigates the diversification demand of an agent, who is faced with the alternative to swap aggregate labour-income risk for equity-exposure, through her individual account in a mandatory-pension scheme. The framework for the analysis is a life-cycle model of a borrowing-constrained individual´s consumption- and portfolio-choice in the presence of uncertain labour-income and realistically calibrated tax- and pension systems. Pension benefits stem from both defined benefit and notionally defined contributions part, the latter being indexed to stochastic aggregate labour-income. We show that agents, depending on age and swap premium, agents will be either buyers or sellers of such a swap, and that inter-generational risk sharing can therefore be achieved.

Keywords: Life-cycle; portfolio choice; pensions; Shiller-swap (search for similar items in EconPapers)
JEL-codes: D91 G11 G23 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2006-07-21, Revised 2006-10-24
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (1)

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