Working Papers

June 2014, No. 14-13R

Labor-Market Uncertainty and Portfolio Choice Puzzles (Revised July 2017)

Yongsung Chang, Jay H. Hong and Marios Karabarbounis

The standard life-cycle models of household portfolio choice have difficulty generating a realistic age profile of risky share. These models not only imply a high risky share on average, but also a steeply decreasing age profile, whereas the risky share is mildly increasing in the data. We introduce age-dependent labor-market uncertainty into an otherwise standard model. A great uncertainty in the labor market--high unemployment risk, frequent job turnovers, and an unknown career path--prevents young workers from taking too much risk in the financial market. As labor-market uncertainty is resolved over time, workers start taking more risk in their financial portfolios.



Our Research Focus: Consumer Finance, Labor Markets

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