International diversification and industry-related labor income risk

Fugazza, Carolina; Giofré, Maela; Nicodano, Giovanna

doi:10.1016/j.iref.2011.02.008

Cited by 8 publications

(3 citation statements)

References 54 publications

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“…We point out that the estimate of the correlation coefficient over the whole sample yields a statistical zero value since individual correlations are widely scattered across negative and positive values. This argument supports and extends similar observations in Eiling (2013) and Fugazza, Gioifrè, and Nicodano (2011).…”

Section: Introductionsupporting

confidence: 93%

Hedging Labor Income Risk over the Life-Cycle

et al. 2019

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We show that the decision to participate in the stock market depends on the ability of equities to hedge the individual permanent earnings shocks, consistent with implications of life-cycle models. Those households who refrain from stock investing display positive correlation between their own permanent income innovations and market returns. These results owe to a two-step empirical strategy. First, a minimum distance estimation disentangles the aggregate from the idiosyncratic permanent of labor income risks. The second step reconstructs the individual life-cycle dynamics of persistent shocks through a Kalman filter applied to the estimated labor income process. We are thus able to obtain the full cross-sectional distribution of individual correlations between permanent shock and market returns.

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Section: Introductionsupporting

confidence: 93%

Hedging Labor Income Risk over the Life-Cycle

et al. 2019

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“…They show that introducing new financial assets, such as an equity portfolio that matches the industry composition of the persons in the cohort, leads to substantial welfare gains. Fugazza, Giofré, and Nicodano (2011) argue that the optimal portfolios of pension funds vary depending on the industry in which the members work.…”

mentioning

confidence: 99%

Industry‐Specific Human Capital, Idiosyncratic Risk, and the Cross‐Section of Expected Stock Returns

EILING

2013

The Journal of Finance

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Human capital is one of the largest assets in the economy and in theory may play an important role for asset pricing. Human capital is heterogeneous across investors. One source of heterogeneity is industry affiliation. I show that the cross-section of expected stock returns is primarily affected by industry-level rather than aggregate labor income risk. Furthermore, when human capital is excluded from the asset pricing model, the resulting idiosyncratic risk may appear to be priced. I find that the premium for idiosyncratic risk documented by several empirical studies depends on the covariance between stock and human capital returns.

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“…In addition, Kroencke and Schindler (2012) found that adding international real estate to an already internationally diversified equity portfolio resulted in a significant diversification benefit. It is evident that international diversification provides an important hedging opportunity in stock markets (Topaloglou et al 2002;Fugazza et al 2011). Nevertheless, U.S. investors still hold significantly less foreign stocks compared to the optimal number according to the portfolio theory (Herold and Maurer 2003).…”

Section: Optimal Portfolio Size Across Different Capital Marketsmentioning

confidence: 99%

How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature

Zaimović

Omanovic

Arnaut-Berilo

2021

JRFM

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Using extensive and comprehensive databases to select a subset of research papers, we aim to critically analyze previous empirical studies to identify certain patterns in determining the optimal number of stocks in well-diversified portfolios in different markets, and to compare how the optimal number of stocks has changed over different periods and how it has been affected by market turmoil such as the Global Financial Crisis (GFC) and the current COVID-19 pandemic. The main methods used are bibliometric analysis and systematic literature review. Evaluating the number of assets which lead to optimal diversification is not an easy task as it is impacted by a huge number of different factors: the way systematic risk is measured, the investment universe (size, asset classes and features of the asset classes), the investor’s characteristics, the change over time of the asset features, the model adopted to measure diversification (i.e., equally weighted versus optimal allocation), the frequency of the data that is being used, together with the time horizon, conditions in the market that the study refers to, etc. Our paper provides additional support for the fact that (1) a generalized optimal number of stocks that constitute a well-diversified portfolio does not exist for whichever market, period or investor. Recent studies further suggest that (2) the size of a well-diversified portfolio is larger today than in the past, (3) this number is lower in emerging markets compared to developed financial markets, (4) the higher the stock correlations with the market, the lower the number of stocks required for a well-diversified portfolio for individual investors, and (5) machine learning methods could potentially improve the investment decision process. Our results could be helpful to private and institutional investors in constructing and managing their portfolios and provide a framework for future research.

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International diversification and industry-related labor income risk

Cited by 8 publications

References 54 publications

Hedging Labor Income Risk over the Life-Cycle

Hedging Labor Income Risk over the Life-Cycle

Industry‐Specific Human Capital, Idiosyncratic Risk, and the Cross‐Section of Expected Stock Returns

How Many Stocks Are Sufficient for Equity Portfolio Diversification? A Review of the Literature

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