Evert Carlsson, n/a, Centre for Finance, School of Business, Economics and Law, Göteborg University, Vasag 1, Box 640, Göteborg, 405 30, Sweden and Karl Erlandzon, MBA, CFF, School of Business, Economics and Law, Göteborg University, Vasag 1, Göteborg, 40530, Sweden.
This paper investigates the diversification-demand of an agent 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-choices 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 parts, the latter indexed to stochastic aggregate labour-income. We show that 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. Key Words: Life-cycle, portfolio choice, pensions, Shiller-swap. JEL classification: D91, G11, G23