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Marco Magnani and Mario Menegatti
''Precautionary saving and changes in risk correlation''
( 2015, Vol. 35 No.1 )
This note analyzes the effect of a change in the covariance between labor income risk and interest rate risk on the threshold level for prudence ensuring positive precautionary saving, recently derived by Baiardi, Magnani and Menegatti (2014). We show that this effect is different in different cases. An increase in the covariance between the two risks decreases (increases) the threshold level when the variance of labor income is smaller (larger) than the variance of the return on saving. An interpretation of these results in terms of elasticity of total variance with respect to saving is provided.
Keywords: Precautionary saving, labor income risk, interest rate risk, prudence, risk covariance
JEL: D8 - Information, Knowledge, and Uncertainty: General
D1 - Household Behavior: General
Manuscript Received : Dec 23 2014 Manuscript Accepted : Mar 12 2015

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