Higher-order income risk over the business cycle

Arbeitspapier

We extend the canonical income process with persistent and tran- sitory 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 per- sistent 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, higher- order risk has sizable welfare implications, which depend on risk atti- tudes; second, it matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, it has non-trivial implications for self-insurance against shocks.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ICIR Working Paper Series ; No. 36/21

Classification and Topics

• Classification: Wirtschaft
• Subject: Idiosyncratic Income Risk ; Cyclical Income Risk ; Life-Cycle Model

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Busch, Christopher ; Ludwig, Alexander
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, International Center for Insurance Regulation (ICIR)
• (where): Frankfurt a. M.
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/231502
• Last update: 10.03.2025, 11:42 AM CET