Hedging Labor Income Risk

Riksbank Research Paper Series No. 86

Sveriges Riksbank Working Paper Series No. 255

48 Pages Posted: 23 Feb 2012

See all articles by Sebastien Betermier

Sebastien Betermier

McGill University - Desautels Faculty of Management

Thomas Jansson

Sveriges Riksbank - Research Division

Christine A. Parlour

University of California, Berkeley - Finance Group

Johan Walden

University of California, Berkeley - Finance Group

Date Written: November 1, 2011

Abstract

We use a detailed panel data set of Swedish households to investigate the relation between their labor income risk and financial investment decisions. In particular, we relate changes in wage volatility to changes in the portfolio holdings for households that switched industries between 1999 and 2002. We find that households do adjust their portfolio holdings when switching jobs, which is consistent with the idea that households hedge their human capital risk in the stock market. The results are statistically and economically significant. A household going from an industry with low wage volatility to one with high volatility will ceteris paribus decrease its portfolio share of risky assets by up to 35%, or USD 15,575.

Suggested Citation

Betermier, Sebastien and Jansson, Thomas and Parlour, Christine A. and Walden, Johan, Hedging Labor Income Risk (November 1, 2011). Riksbank Research Paper Series No. 86, Sveriges Riksbank Working Paper Series No. 255, Available at SSRN: https://ssrn.com/abstract=1972883 or http://dx.doi.org/10.2139/ssrn.1972883

Sebastien Betermier (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Thomas Jansson

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Christine A. Parlour

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Johan Walden

University of California, Berkeley - Finance Group ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 643-0547 (Phone)

HOME PAGE: http://www.haas.berkeley.edu/faculty/walden.html

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