Thursday, 10 April 2008: 16:40
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