Life-Cycle Risk-Taking with Personal Disaster Risk

62 Pages Posted: 22 Feb 2023

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; Center for Research on Pensions and Welfare Policies

Giovanna Nicodano

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

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Abstract

Inspired by a growing body of empirical work, this paper models a non-linear labor income process allowing for a personal disaster, such as long-term unemployment or disability, during working years. Such a disaster entails an uncertain but potentially large permanent shock to earnings. Personal disaster risk allows to match moderate risk-taking of young investors and a flat investment profile in age, observed in the United States, when the calibration of both the disaster probability and the expected permanent loss in the disaster state is conservative.

Keywords: Life-cycle portfolio choice, disaster risk, beta distribution, non-linear income process, unemployment risk, disability risk

Suggested Citation

Bagliano, Fabio C. and Fugazza, Carolina and Nicodano, Giovanna, Life-Cycle Risk-Taking with Personal Disaster Risk. Available at SSRN: https://ssrn.com/abstract=4367069 or http://dx.doi.org/10.2139/ssrn.4367069

Fabio C. Bagliano (Contact Author)

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

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Carolina Fugazza

University of Torino -Department of Economics ESOMAS ( email )

Torino
Italy

Center for Research on Pensions and Welfare Policies ( email )

Torino
Italy

Giovanna Nicodano

University of Turin - Department ESOMAS ( email )

Turin, 10134
Italy

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Collegio Carlo Alberto ( email )

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HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

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