Can Risk Be Shared Across Investor Cohorts? Evidence from a Popular Savings Product
Charles A. Dice Center Working Paper No. 2019-17
81 Pages Posted: 16 Jul 2019 Last revised: 4 Aug 2020
Date Written: July 31, 2020
We study how retail savings products can share market risk across investor cohorts, thereby completing financial markets. Financial intermediaries smooth returns by varying reserves, which are passed on between successive investor cohorts, redistributing wealth across cohorts. Using data on euro contracts sold by life insurers in France, we estimate this redistribution to be large: 0.8% of GDP. We develop and provide evidence for a model in which low investor sophistication, while leading to individually sub-optimal decisions, improves risk sharing by allowing inter-cohort risk sharing.
Keywords: Inter-cohort risk sharing; Life insurers
JEL Classification: G22, G52
Suggested Citation: Suggested Citation