Giovanna Nicodano, University of Torino, will be joining us on 25 May 2021 presenting sponsored research co-authored with Fabio Bagliano, Carolina Fugazza and Raffaele Corvinho titled “The Income-hedging motive of stock market participation”.
The webinar will be open to Inquire Europe, Inquire UK and other interested public, making it a uniquely exciting opportunity to share knowledge with a broader (virtual) audience.
Life-cycle theory implies that the correlation between Permanent Income (PI) shocks to earnings and stock returns is a key determinant of equity market participation. However, estimating such correlation proves difficult due to both the short time series dimension of the data and the unobservable nature of PI shocks. Using the restrictions implied by a mainstream labour income process and exploiting the cross-sectional dimension of the data, our method reconstructs the life-cycle dynamics of PI shocks for households belonging to clusters with homogeneous characteristics. This delivers precise estimates of both initial and updated individual correlations between PI shocks and stock returns, even with a short time-series dimension of the data. Consistent with life-cycle theory, risk taking by each household is highly sensitive to such correlation, also in an out-of-sample experiment.
Our analysis may be relevant to delegated portfolio managers and (robo) advisors that may rely on it in order to match investors to alternative portfolios and revise such matching over time. By calibrating a portfolio choice model using our estimates, we provide an example delivering the optimal glide path for heterogeneous groups of individuals displaying different correlations between PI shocks and stock returns. These findings point to the possibility of a personalised implementation of target date funds, that are a common vehicle for pension investing.
Giovanna Nicodano is professor of Financial Economics and director of the Master in Finance, Insurance, and Risk Management at the University of Torino, fellow of Collegio Carlo Alberto, scientific committee member of the European Systemic Risk Board, international fellow of the Dutch Network for Studies on Pensions, Aging and Retirement (Netspar), a research fellow of CEPR, a research associate of the European Corporate Governance Institute. A visiting scholar at the London School of Economics and Imperial College London, she publishes in top scientific journals including the Journal of Finance, the Review of Financial Studies, the Journal of Financial Economics, and the Review of Finance.
Register now to secure your place.