Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 255: Hedging Labor Income Risk
Sebastien Betermier (), Thomas Jansson (), Christine A. Parlour () and Johan Walden ()
Additional contact information
Sebastien Betermier: The Desautels Faculty of Management
Thomas Jansson: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Christine A. Parlour: The Haas School of Business
Johan Walden: The Haas School of Business
Abstract: 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 statis- tically and economically significant. A household going from an industry with low wage volatility to one with high volatility will ceteris paribus decrease its portfolio share of risky assets by up to 35%, or USD 15,575.
Keywords: investment decisions; hedging; human capital
52 pages, November 1, 2011
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