In this paper we extend the traditional life cycle model of saving and portfolio choice to allow for possible long-term unemployment spells to have permanent effects on subsequent labor income prospects. The risk of losing future labor income could imply strong human capital erosion for the...

Human capital is the present value of future wages, which can be a large component of the total wealth of active workers. This raises the question of whether labour income risk can be hedged by how the retirement savings of workers are invested. The answer is that it cannot be hedged if...

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...