DP16234 Life-Cycle Risk-Taking with Personal Disaster Risk
|Author(s):||Fabio-Cesare Bagliano, Carolina Fugazza, Giovanna Nicodano|
|Publication Date:||June 2021|
|Keyword(s):||beta distribution, disaster risk, non-linear income process, Portfolio choice|
|JEL(s):||D15, E21, G11|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16234|
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.