Life-Cycle Risk-Taking with Personal Disaster Risk
51 Pages Posted: 14 Jul 2021
Date Written: June 2021
This paper examines households' self-insurance in financial markets when a rare personal disaster, such as disability or long-term unemployment, may occur during working years. Personal disaster risk alters lifetime ex-ante investment choices, even if most workers will not experience a disaster. Uncertainty about the size of human capital losses, which characterizes rare disasters, results in lower risk-taking at the beginning of working life, and is crucial in order to match the observed age profiles of US investors from 1992 to 2016.
JEL Classification: D15, E21, G11
Suggested Citation: Suggested Citation