Life-cycle Investing with Personal Disaster Risk

35 Pages Posted: 14 Oct 2020

See all articles by Fabio C. Bagliano

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics; Center for Research on Pensions and Welfare Policies (CeRP); University of Turin - Collegio Carlo Alberto

Carolina Fugazza

University of Torino - Department of Economics ESOMAS

Giovanna Nicodano

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

Date Written: October 13, 2020

Abstract

This paper extends the life-cycle model by allowing for a small risk of a personal disaster with permanent effects on labour income. We calibrate the model to long-term unemployment (LTU) in the US, where it is only partially insured and is known to entail scarring effects. Despite its low probability, such risk boosts early investment in the risk-free asset. Consequently, the optimal equity portfolio share is relatively flat over the life cycle, consistent with observed investment profiles. A negligible probability of LTU or full insurance against it result in both higher optimal risk taking and equity profiles that are downward sloping in age.

Suggested Citation

Bagliano, Fabio C. and Fugazza, Carolina and Nicodano, Giovanna, Life-cycle Investing with Personal Disaster Risk (October 13, 2020). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3710543 or http://dx.doi.org/10.2139/ssrn.3710543

Fabio C. Bagliano

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

C. so Unione Sovietica, 218 Bis
Torino, I-10134
Italy
+39 011 670 6084 (Phone)
+39 011 670 6062 (Fax)

HOME PAGE: http://web.econ.unito.it/bagliano

Center for Research on Pensions and Welfare Policies (CeRP) ( email )

Via Real Collegio, 30
Moncalieri, Turin 10024
Italy

University of Turin - Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

Carolina Fugazza (Contact Author)

University of Torino - Department of Economics ESOMAS ( email )

Torino
Italy

Giovanna Nicodano

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

CEPR ( email )

London
United Kingdom

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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