Evert Carlsson () and Karl Erlandzon ()
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Evert Carlsson: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG
Karl Erlandzon: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: Box 640, SE 405 30 GÖTEBORG
Abstract: This paper investigates the diversification demand of an agent, who is faced with the alternative to swap aggregate labour-income risk for equity-exposure, through her individual account in a mandatory-pension scheme. The framework for the analysis is a life-cycle model of a borrowing-constrained individual´s consumption- and portfolio-choice in the presence of uncertain labour-income and realistically calibrated tax- and pension systems. Pension benefits stem from both defined benefit and notionally defined contributions part, the latter being indexed to stochastic aggregate labour-income. We show that agents, depending on age and swap premium, agents will be either buyers or sellers of such a swap, and that inter-generational risk sharing can therefore be achieved.
Keywords: Life-cycle; portfolio choice; pensions; Shiller-swap
23 pages, First version: July 21, 2006. Revised: October 24, 2006.
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