Unemployment and Portfolio Choice: Does Persistence Matter?

Franziska Bremus and Vladimir Kuzin

No 77, IAW Discussion Papers from Institut für Angewandte Wirtschaftsforschung (IAW)

Abstract: Households can rely on private savings or on public unemployment insurance to hedge against the risk of becoming unemployed. These hedging mechanisms are used differently across countries. In this paper, we use a life cycle model to study the effects of unemployment on the portfolio choice of households in the US and in Germany. We distinguish short- and long-term unemployment and find that, in case of short-term unemployment, unemployment insurance offsets the negative impact of unemployment risk on households’ equity holdings. When incorporating long-term unemployment, the US-equity share drops. This negative effect of unemployment is mainly driven by its high expected duration. In Germany, however, long-term unemployment does not significantly alter portfolio decisions. We show that different responses of portfolios to unemployment risk can be attributed to both differences in social security payments and different age-income profiles.

Keywords: long-term unemployment; social security; precautionary savings labor market institutions; employment adjustment (search for similar items in EconPapers)
JEL-codes: D91 E21 H31 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2011-11
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http://www.iaw.edu/RePEc/iaw/pdf/iaw_dp_77.pdf (application/pdf)

Related works:
Journal Article: Unemployment and portfolio choice: Does persistence matter? (2014)
Working Paper: Unemployment and Portfolio Choice: Does Persistence Matter? (2010)
Working Paper: Unemployment and Portfolio Choice: Does Persistence Matter? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:iaw:iawdip:77

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