Can Risk Be Shared Across Investor Cohorts? Evidence from a Popular Savings Product

Fisher College of Business Working Paper No. 2019-03-017

Charles A. Dice Center Working Paper No. 2019-17

81 Pages Posted: 16 Jul 2019 Last revised: 4 Aug 2020

See all articles by Johan Hombert

Johan Hombert

HEC Paris - Finance Department

Victor Lyonnet

Ohio State University (OSU)

Multiple version iconThere are 2 versions of this paper

Date Written: July 31, 2020

Abstract

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

Hombert, Johan and Lyonnet, Victor, Can Risk Be Shared Across Investor Cohorts? Evidence from a Popular Savings Product (July 31, 2020). Fisher College of Business Working Paper No. 2019-03-017, Charles A. Dice Center Working Paper No. 2019-17, Available at SSRN: https://ssrn.com/abstract=3420354 or http://dx.doi.org/10.2139/ssrn.3420354

Johan Hombert

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Victor Lyonnet (Contact Author)

Ohio State University (OSU) ( email )

Columbus, OH 43210
United States

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