Papers by Carolina Fugazza
In this paper we focus on the relative role of job finding and job exit in shaping the employment... more In this paper we focus on the relative role of job finding and job exit in shaping the employment risk over the life cycle. Using Italian labor market data we document that the risk of being fired and the chance of re-employment display substantial heterogeneity depending on age, cohort and occupational characteristics. We show how the two risk combine in shaping the employment risk. Our results evidence that the life cycle employment probability profile is hump shaped with a peak at adult age and that this dynamic is mainly driven by the "U"-age profile of transitions from employment to unemployment. Moreover, we find that differences in job finding probabilities are mainly responsible for the heterogeneity in the employment risk across working groups.
We present a life-cycle model for pension funds ' optimal asset allocation, where the agents... more We present a life-cycle model for pension funds ' optimal asset allocation, where the agents ' labor income process is calibrated to capture a realistic hump-shaped pattern and the available financial assets include one riskless and two risky assets, with returns potentially correlated with labor income shocks. The sensitivity of the optimal allocation to the degree of investors ' risk aversion and the level of the replacement ratio is explored. Also, the welfare costs associated with the adoption of simple sub-optimal strategies ("age rule " and " 1/N rule") are computed, and welfare-based metrics for pension fund evaluation are discussed. 1
We present a life-cycle model for pension funds ’ optimal asset al-location, where the agents ’ l... more We present a life-cycle model for pension funds ’ optimal asset al-location, where the agents ’ labor income process is calibrated to cap-ture a realistic hump-shaped pattern and the available financial as-sets include one riskless and two risky assets, with returns potentially correlated with labor income shocks. The sensitivity of the optimal allocation to the degree of investors ’ risk aversion and the level of the replacement ratio is explored. Also, the welfare costs associated with the adoption of simple sub-optimal strategies ("age rule " and " 1/N rule") are computed, and new welfare-based metrics for pension fund evaluation are disussed.
Recent research [e.g., DeMiguel, Garlappi and Uppal, (2009), Rev. Fin. Studies] has cast doubts o... more Recent research [e.g., DeMiguel, Garlappi and Uppal, (2009), Rev. Fin. Studies] has cast doubts on the out-of-sample performance of optimizing portfolio strategies relative to naive, equally-weighted ones. However, existing results concern the simple case in which an investor has a one-month horizon and meanvariance preferences. In this paper, we examine whether their result holds for longer investment horizons, when the asset menu includes bonds and real estate beyond stocks and cash, and when the investor is characterized by constant relative risk aversion preferences which are not locally mean-variance for long horizons. Our experiments indicates that power utility investors with horizons of one year and longer would have on average benefited, ex-post, from an optimizing strategy that exploits simple linear predictability in asset returns over the period January 1995- December 2007. This result is insensitive to the degree of risk aversion, to the number of predictors being inclu...
This paper analyzes the costs of third-pillar individual pension plans currently available in Ita... more This paper analyzes the costs of third-pillar individual pension plans currently available in Italy, namely pension insurance policies and open pension funds, which are new products in the Italian savings market. For lack of data on annuities, the analysis is limited to the accumulation phase. To evaluate costs, we use different simulation scenarios, changing the length of the contribution period and the gross returns attainable on financial markets; we also consider participants with different life income and contribution profiles. Following international literature, we present cost measures which reflect the reduction in both the final accumulated pension wealth and the annual rate of return. The main result of our analysis is the existence of a substantial dichotomy in the market. On one side, open pension funds have moderate costs, close to those of voluntary pension plans in other countries and also to those of the Italian occupational pension funds (i.e. the second pillar). On...
This paper uses a life cycle framework to derive a benchmark to evaluate pension funds. We presen... more This paper uses a life cycle framework to derive a benchmark to evaluate pension funds. We present a model for optimal asset allocation, where the agents’labor income process is calibrated to capture a realistic pattern and the available …nancial assets include one riskless and two risky assets, with returns potentially correlated with labor income shocks. The optimal asset allocation is the benchmark for pension funds performance. Also, the welfare costs associated with the adoption of simple sub-optimal strategies ("age rule" and "1=N rule") are computed, and a new welfare-based metric for pension fund evaluation are disussed.
We present a life-cycle model for pension funds’ optimal asset allocation, where the agents’ labo... more We present a life-cycle model for pension funds’ optimal asset allocation, where the agents’ labor income process is calibrated to capture a realistic hump-shaped pattern and the available financial assets include one riskless and two risky assets, with returns potentially correlated with labor income shocks. The sensitivity of the optimal allocation to the degree of investors’ risk aversion and the level of the replacement ratio is explored. Also, the welfare costs associated with the adoption of simple sub-optimal strategies ("age rule" and "1/N rule") are computed, and new welfare-based metrics for pension fund evaluation are disussed.
We calculate the ex-post portfolio performance for an investor who diversifies among stocks, bond... more We calculate the ex-post portfolio performance for an investor who diversifies among stocks, bonds, REITS and cash. Simulations are performed for two alternative asset allocation frameworks – classical and Bayesian - and for scenarios involving two different samples and six different investment horizons. Interestingly, the ex-post welfare cost of restricting portfolio choices to traditional financial assets only is found to be positive in all scenarios for a Bayesian investor. On the contrary, substitution of E-REITS for stocks in optimal portfolios turns out to reduce ex-post portfolio performance over the nineties for a Classical investor.
In this paper we focus on the relative role of job finding and job exit in shaping the employment... more In this paper we focus on the relative role of job finding and job exit in shaping the employment risk over the life cycle. Using Italian labor market data we document that the risk of being fired and the chance of reemployment display substantial heterogeneity depending on age, cohort and occupational characteristics. We show how the two risk combine in shaping the employment risk. Our results evidence that the life cycle employment probability profile is hump shaped with a peak at adult age and that this dynamic is mainly driven by the “U” –age profile of transitions from employment to unemployment. Moreover, we find that differences in job finding probabilities are mainly responsible for the heterogeneity in the employment risk across working groups.
Inspired by a growing body of empirical work, this paper models a non-linear labour income proces... more Inspired by a growing body of empirical work, this paper models a non-linear labour income process allowing for a personal disaster, such as long-term unemployment or disability, during working years. This entails an uncertain but potentially large permanent shock to earnings. Personal disaster risk allows to match the flat investment profile in age, which is observed in the US, when the calibration of both the disaster probability and the expected permanent loss in the disaster state is conservative.
We calculate optimal portfolio choices for a long-horizon, risk-averse European investor who dive... more We calculate optimal portfolio choices for a long-horizon, risk-averse European investor who diversifies among stocks, bonds, real estate, and cash, when excess asset returns are predictable. Simulations are performed for scenarios involving different risk aversion levels, horizons, and statistical models capturing predictability in risk premia. Importantly, under one of the scenarios, the investor takes into account the parameter uncertainty implied by the use of estimated coefficients to characterize predictability. We find that real estate ought to play a significant role in optimal portfolio choices, with weights between 10 and 30% in most cases. Under plausible assumptions, the welfare costs of either ignoring predictability or restricting portfolio choices to financial assets only are found to be in the order of at least 100 basis points per year. These results are robust to changes in the benchmarks and in the statistical framework. JEL Classification Codes: G11, L85.
The Great Recession has highlighted that long-term unemployment may become a trap with loss of hu... more The Great Recession has highlighted that long-term unemployment may become a trap with loss of human capital. This paper extends the life-cycle model allowing for a small risk of long-term unemployment with permanent effects on labour income. Such nonlinear income risk dampens both early consumption and early investment in risky assets, resulting in an optimal equity portfolio share relatively flat in age. The driver of such flattening in the life-cycle profile is the resolution of uncertainty, as the worker ages, concerning this personal disaster. Shifting to such flatter investment profile away from a simple "age rule" delivers mean welfare gains that are three times larger than in models with linear labour income shocks.
This paper investigates how job separation and job finding probabilities shape the unemployment r... more This paper investigates how job separation and job finding probabilities shape the unemployment risk across ages and working group characteristics. Improving on current methods, I estimate duration models for employment and unemployment separately. I then use the duration analysis results to derive the individual age profiles of conditional transitions in and out of unemployment as well as the unconditional unemployment risk profile over the whole working life. This approach allows adapting the decomposition of changes in unemployment risk, which has so far only been used to study aggregate unemployment dynamics (Shimer, 2007 and 2012; Fujita and Ramey, 2009). I find that differences in job separation rates across ages underlie the observed age differences in unemployment risk. When differences between working groups are under consideration, the job findings are just as important as the job separation probability.
SSRN Electronic Journal, 2000
SSRN Electronic Journal
We show that the decision to participate in the stock market depends on the ability of equities t... more We show that the decision to participate in the stock market depends on the ability of equities to hedge the individual permanent earnings shocks, consistent with implications of life-cycle models. Those households who refrain from stock investing display positive correlation between their own permanent income innovations and market returns. These results owe to a two-step empirical strategy. First, a minimum distance estimation disentangles the aggregate from the idiosyncratic permanent of labor income risks. The second step reconstructs the individual life-cycle dynamics of persistent shocks through a Kalman filter applied to the estimated labor income process. We are thus able to obtain the full cross-sectional distribution of individual correlations between permanent shock and market returns.
The B.E. Journal of Economic Analysis & Policy
This paper investigates how job separation and job-finding probabilities shape the non-employment... more This paper investigates how job separation and job-finding probabilities shape the non-employment risk across ages and working group characteristics. Improving on current methods, I estimate duration models for employment and non-employment separately. I then use the results to derive the individual age profiles of conditional transitions in and out of non-employment as well as the unconditional non-employment risk profile over the whole working life. This approach allows me to apply the decomposition of changes in individual non-employment risk. To date, this type of decomposition has only been used to study aggregate non-employment dynamics. I find that differences in job separation rates across ages underlie the observed age differences in non-employment risk. When differences between working groups are under consideration, the job finding probability is just as important as the job separation probability.
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Papers by Carolina Fugazza