Hedging labor income risk

We use a detailed panel data set of Swedish households to investigate the relation between their labor income risk and financial investment decisions. In particular, we relate changes in wage volatility to changes in the portfolio holdings for households that switched industries between 1999 and 200...

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Bibliographic Details
Published in:Journal of financial economics 2012-09, Vol.105 (3), p.622-639
Main Authors: Betermier, Sebastien, Jansson, Thomas, Parlour, Christine, Walden, Johan
Format: Article
Language:English
Subjects:
Ceteris paribus
Economics
Family income
Hedging
Household income
Households
Human capital
Income
Investment decision
Investment decisions
Investment policy
Investments
Panel data
Portfolio selection
Portfolios
Risk
stock market
Studies
Uncertainty
Volatility
Wage levels
Wages & salaries
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Summary:We use a detailed panel data set of Swedish households to investigate the relation between their labor income risk and financial investment decisions. In particular, we relate changes in wage volatility to changes in the portfolio holdings for households that switched industries between 1999 and 2002. We find that households do adjust their portfolio holdings when switching jobs, which is consistent with the idea that households hedge their human capital risk in the stock market. The results are statistically and economically significant. A household going from an industry with low wage volatility to one with high volatility ceteris paribus decreases its portfolio share of risky assets by up to 35%, or $15,575.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2012.05.001