Can Pension Funds Hedge Wage Risk?

8 Pages Posted: 23 May 2009

See all articles by Carolina Fugazza

Carolina Fugazza

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Center for Research on Pensions and Welfare Policies

Maela Giofré

University of Turin - Department of Economics and Statistics; CeRP-CCA; Netspar

Giovanna Nicodano

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

Date Written: May 20, 2009

Abstract

Human capital is the present value of future wages, which can be a large component of the total wealth of active workers. This raises the question of whether labour income risk can be hedged by how the retirement savings of workers are invested. The answer is that it cannot be hedged if correlations between labour income and financial return fluctuations are zero, or close to it. Previous research suggests this is generally the case at the total economy level, when domestic investments are used. This article presents the results of a study addressing the above question at the industry level, using a menu of foreign investment indexes. Specifically, we examine the situations of American and Canadian workers in seven different industries whose pension funds can invest in the equity markets of ten countries, including their own. We find significant positive and negative correlations between wage and return fluctuations, which point to opportunities to hedge labour income risk at the individual industry level through the investment of industry pension funds.

Keywords: International Diversification, Labour Income, Pension Funds, Portfolio Choice, Rotman

Suggested Citation

Fugazza, Carolina and Giofré, Maela and Nicodano, Giovanna, Can Pension Funds Hedge Wage Risk? (May 20, 2009). Rotman International Journal of Pension Management, Vol. 2, No. 1, 2009, Available at SSRN: https://ssrn.com/abstract=1408680

Carolina Fugazza

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Center for Research on Pensions and Welfare Policies ( email )

Via Real Collegio, 30
Moncalieri, Turin - Piedmont 10124
Italy

Maela Giofré

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

Lungo Dora Siena 100/A
Torino, Turin - Piedmont 10153
Italy

CeRP-CCA ( email )

Via Real Collegio 30
Moncalieri (TO), Turin 10024
Italy

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Giovanna Nicodano (Contact Author)

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

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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