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Life-cycle risk-taking with personal disaster risk

Fabio Bagliano (), Carolina Fugazza and Giovanna Nicodano

No 132, ESRB Working Paper Series from European Systemic Risk Board

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. JEL Classification: D15, E21, G11

Keywords: beta distribution; disability risk; disaster risk; non-linear income process; portfolio choice; unemployment risk (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-dge and nep-rmg
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