Séminaire: Risk Management and Saving: Income Effects and Background Risk

17 septembre 2014

22 septembre 2014Lille

Speaker: Richard Peter (Ludwig-Maximilians-Universität München, Germany)

Date: Monday, September 22nd, 2014 at 2.00 p.m.

Location: IESEG School of Management, 3 rue de la Digue, 59000 Lille

Room : A320


We study the interplay of intertemporal risk management and saving decisions. We define risk
management broadly by allowing the activity to influence the severity of loss, the probability of
loss, or both simultaneously. Due to the similar cost-benefit structure of risk management and
saving decisions a substitution effect arises whose implications we analyze for changes in income
and background risk. Typically, the direct effects for risk management and saving move in the
same direction but because of substitution net effects become a priori ambiguous. We resolve
this ambiguity by deriving necessary and sufficient conditions. Our paper cautions against the
use of single-instrument models as spurious results will emerge.