Higher-order income risk over the business cycle

Christopher Busch and Alexander Ludwig

No 36/21, ICIR Working Paper Series from Goethe University Frankfurt, International Center for Insurance Regulation (ICIR)

Abstract: We extend the canonical income process with persistent and tran- sitory risk to cyclical shock distributions with left-skewness and excess kurtosis. We estimate our income process by GMM for US household data. We find countercyclical variance and procyclical skewness of per- sistent shocks. All shock distributions are highly leptokurtic. The tax and transfer system reduces dispersion and left-skewness. We then show that in a standard incomplete-markets life-cycle model, first, higher- order risk has sizable welfare implications, which depend on risk atti- tudes; second, it matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, it has non-trivial implications for self-insurance against shocks.

Keywords: Idiosyncratic Income Risk; Cyclical Income Risk; Life-Cycle Model (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-dge, nep-ias and nep-rmg
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Citations: View citations in EconPapers (6)

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https://www.econstor.eu/bitstream/10419/231502/1/175024991X.pdf (application/pdf)

Related works:
Journal Article: HIGHER‐ORDER INCOME RISK OVER THE BUSINESS CYCLE (2024)
Working Paper: Higher-Order Income Risk over the Business Cycle (2020)
Working Paper: Higher-Order Income Risk over the Business Cycle (2020)
Working Paper: Higher-Order Income Risk over the Business Cycle (2020)
Working Paper: Higher-order income risk over the business cycle (2020)
Working Paper: Higher-order income risk over the business cycle (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:icirwp:3621

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