Climbing and Falling Off the Ladder: Asset Pricing Implications of Labor Market Event Risk

What Matters to Individual Investors? Evidence from the Horse’s Mouth

“…Even if the risks are uncorrelated with stock returns, the optimal allocation to stocks could still decrease in principle (Pratt and Zeckhauser (1987), Kimball (1993), Gollier and Pratt (1996)). The empirical literature on background labor income risk generally finds negative effects on equity allocations (Guiso, Jappelli, and Terlizzese (1996), Hochguertel (2003), Angerer and Lam (2009), Palia, Qi, and Wu (2014), Schmidt (2016), Fagereng, Guiso, and Pistaferri (2018)), although the magnitude of these estimates is often small, perhaps due to the econometric problems discussed by Fagereng, Guiso, and Pistaferri (2018). Rosen and Wu (2004) also find that households in poor health hold a lower share in risky assets.…”

Asymmetric Business-Cycle Risk and Social Insurance

“…A growing number of theoretical and quantitative studies emphasizes the importance of the higher-order moments of income shocks for various economic questions. In asset pricing, several papers have found that the procyclical skewness of consumption (and income) growth helps explain various puzzling features of asset prices (Mankiw (1986), Constantinides and Ghosh (2014), Schmidt (2016)). Recent research on monetary and fiscal policy also emphasizes the role of higher-order income risk in shaping optimal policy or in modifying the standard channels through which policy works.…”

A Likelihood-Based Comparison of Macro Asset Pricing Models

“…Constantinides and Ghosh (2017) use GMM to estimate a model with idiosyncratic risk, but they do not use the correlation between asset prices and idiosyncratic risk in their estimation. Schmidt (2015) argues that initial claims for unemployment is a reasonable proxy for idiosyncratic risk, and finds that this measure is highly correlated with the pricedividend ratio.…”