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.