Life-Cycle Asset Allocation and Unemployment Risk

20 Pages Posted: 8 Mar 2016

See all articles by Fabio C. Bagliano

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics; Center for Research on Pensions and Welfare Policies (CeRP); University of Turin - Collegio Carlo Alberto

Carolina Fugazza

University of Torino - Department of Economics ESOMAS

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; CEPR; EGCI; Netspar

Date Written: October 1, 2015

Abstract

In this paper we extend the traditional life cycle model of saving and portfolio choice to allow for possible long-term unemployment spells to have permanent effects on subsequent labor income prospects. The risk of losing future labor income could imply strong human capital erosion for the investor at any age, dampening the incentive to invest in risky stocks. The resulting optimal portfolio share invested in stocks may be relatively flat in age, more in line with the available evidence and contrary to the predictions of traditional life-cycle models.

Keywords: Life-cycle portfolio choice, unemployment risk, human capital depreciation, age rule

JEL Classification: D91, E21, G11

Suggested Citation

Bagliano, Fabio C. and Fugazza, Carolina and Nicodano, Giovanna, Life-Cycle Asset Allocation and Unemployment Risk (October 1, 2015). Netspar Discussion Paper No. 10/2015-079, Available at SSRN: https://ssrn.com/abstract=2744761 or http://dx.doi.org/10.2139/ssrn.2744761

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics ( email )

C. so Unione Sovietica, 218 Bis
Torino, I-10134
Italy
+39 011 670 6084 (Phone)
+39 011 670 6062 (Fax)

HOME PAGE: http://web.econ.unito.it/bagliano

Center for Research on Pensions and Welfare Policies (CeRP) ( email )

Via Real Collegio, 30
Moncalieri, Turin 10024
Italy

University of Turin - Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

Carolina Fugazza (Contact Author)

University of Torino - Department of Economics ESOMAS ( email )

Torino
Italy

Giovanna Nicodano

University of Turin - Department ESOMAS ( email )

Turin, 10134
Italy

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano/

Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10121
Italy
390116705006 (Phone)

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

CEPR ( email )

London
United Kingdom

EGCI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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