Management Science 2025
Hedging Permanent Income Shocks
Abstract
This paper robustly connects observed portfolio choices to correlations of individual income shocks with an aggregate shock (or, equivalently, with stock market returns). The share of nonparticipating individuals displaying a positive correlation, and therefore a negative hedging demand for stocks, is above 79% in both our samples. Furthermore, correlations predict nonparticipation to the equity market, also out-of-sample and for the same individual over time. These results support the traditional hedging motive explanation for nonparticipation. Such new insight owes to the income shocks comovements across individuals, which we model and exploit to identify correlations.
- DOI
- 10.1287/mnsc.2024.06893
- Sources
- openalex