We analyzes the optimal asset allocation problem for life insurers that are required to cope with significant background risks originating from life insurance businesses among a set of stochastic investment opportunities including foreign equities. The insurer is assumed to maximize the expected...

Analyses of risk-bearing often assume that agents face only one risk. Agents however usually face several risks and the interaction between them can affect the willingness to bear any one of them. We consider how the introduction of background risk affects the comparative statics predictions of...

Although there has been much attention in recent years on the effects of additive background risks, the same is not true for its multiplicative counterpart. We consider random wealth of the multiplicative form xy, where x and y are statistically independent random variables. We assume that y is...

In a world with complete markets and no transactions cost, the decision whether to rent or buy a home is separate from a household's professional income risk. If markets are incomplete and have frictions, however, profession- specific income risk, regional house price risk, and mobility needs...

We consider the demand for state-contingent claims, in the presence of an independent zero-mean, non-hedgeable background risk. An agent is defined to be generalized risk averse if he/she chooses a demand function for contingent claims with a smaller slope everywhere, given a simple increase in...

We show that people exposed to greater pension risk are less likely to invest in risky assets. We exploit a reform that links people's future pension benefits to their pension funds' funding ratio—a measure of the fund's financial health—making funding ratios a fund-specific measure of...

In fifteen European countries, China, and the US, stocks and business equity as a share of total household assets are represented by an increasing and convex function of income/wealth. A parsimonious model fitted to the data shows why background labor-income risk can explain much of this...

Since the 2008 Lehman bankruptcy, it is clearly shown that global economic and financial crises present major challenges to private households, requiring from them, a high level of shock absorption capacity. According to the old adage, "Do not put all the eggs in one basket", resilience depends,...

In an exchange economy with endowment inequality, we investigate how preferences with external habits affect the equity risk premium. We show that the dynamics of external additive habits with wealth inequality are complex when a background risk is present. It is ambiguous whether wealth...

From standard portfolio-choice theory it is well-understood that background risk, overwhelmingly due to wage risk, is one of the central determinants of individuals' portfolio composition: higher background risk reduces risky investments. However, if background risk is negatively correlated with...