Higher-order income risk over the business cycle
- We extend the canonical income process with persistent and transitory risk to cyclical shock distributions with left-skewness and excess kurtosis. We estimate our income process by GMM for US household data. We find countercyclical variance and procyclical skewness of persistent shocks. All shock distributions are highly leptokurtic. The tax and transfer system reduces dispersion and left-skewness. We then show that in a standard incomplete-markets life-cycle model, first, higherorder risk has sizable welfare implications, which depend on risk attitudes; second, it matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, it has non-trivial implications for self-insurance against shocks.
| Author: | Christopher BuschORCiDGND, Alexander LudwigORCiDGND |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-772538 |
| URL: | https://www.icir.de/fileadmin/user_upload/editors/documents/working_papers/wp_36_ludwig_busch.pdf |
| Series (Serial Number): | ICIR Working Paper Series (No. 36 [28.01.2021]) |
| Publisher: | International Center for Insurance Regulation |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2021 |
| Year of first Publication: | 2021 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2024/04/18 |
| Tag: | Cyclical Income Risk; Idiosyncratic Income Risk; LifeCycle Model |
| Volume: | January 28, 2021 |
| Page Number: | 91 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
