Rare events and annuity market participation |
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Authors: | Paula Lopes Alexander Michaelides |
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Institution: | aFinancial Markets Group, London School of Economics, Houghton Street, London, WC2A 2AE, United Kingdom;bDepartment of Economics, London School of Economics, Houghton Street, London, WC2A 2AE, United Kingdom |
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Abstract: | We investigate whether a rare event (like the default of the annuity provider) can explain the annuity market participation puzzle. High risk aversion is needed to change behavior in the presence of such a disastrous shock but higher risk aversion also makes annuities more valuable. Therefore, these rare events are unlikely candidates to explain the low take-up of voluntary annuities: the conclusion is robust to disentangling risk aversion from intertemporal substitution and to allowing portfolio investment in a stock market index. |
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Keywords: | Annuities Rare events Portfolio choice |
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