Life-Cycle Risk-Taking with Personal Disaster Risk
50 Pages Posted: 30 Dec 2021
Date Written: December, 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.
Keywords: beta distribution, disability risk, disaster risk, non-linear income process, portfolio choice, unemployment risk
JEL Classification: D15, E21, G11
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