Hedging Recessions

47 Pages Posted: 8 Sep 2017 Last revised: 13 Jun 2018

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Linda Sandris Larsen

Copenhagen Business School

Claus Munk

Copenhagen Business School

Date Written: June 4, 2018

Abstract

Traditional life-cycle models conclude that individuals should be fully invested in stocks when young -- in stark contrast to observed stock holdings -- and then gradually replace stocks with bonds as retirement is approaching. We show that a carefully specified and calibrated model of unemployment risk reduces the early-life stock holdings dramatically. The reduction is driven by the decline in current and expected future income caused by unemployment, the relatively high unemployment risk of young adults, and the business cycle variations in un- and reemployment probabilities that tend to deteriorate exactly when stocks perform poorly.

Keywords: Unemployment risk, Business cycle, Life-cycle model, Portfolio planning

JEL Classification: G11, D15

Suggested Citation

Branger, Nicole and Larsen, Linda Sandris and Munk, Claus, Hedging Recessions (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=3032939 or http://dx.doi.org/10.2139/ssrn.3032939

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Linda Sandris Larsen

Copenhagen Business School ( email )

Solbjerg Plads 3, A5
Frederiksberg, 2000
Denmark

Claus Munk (Contact Author)

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

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