Trade Policy and Risk Diversification

Barbara Pfeffer

Volkswirtschaftliche Diskussionsbeiträge from Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht

Abstract: The paper analyses the influence of trade policy on the investment decisions of a rep- resentative individual. In particular, the increased uncertainty of future income is con- sidered in the investment behaviour of individuals. The optimal portfolio-decision of a representative working individual is analysed in comparison to a non-working shareholder. The paper finds an important influence from trade policy on the saving and investment behaviour of a working individual. Yet the optimal demand for an asset does not always increase if a protectionist trade policy is introduced in the corresponding sector as might be expected. The asset covariance and the labor risk correlation, especially the working location of the individual, determine the final results of the investment decision and can even reverse the expected effect from protection. Moreover, an effective hedge for the income risk is not possible in most of the observed scenarios.

Keywords: Protection; Portfolio Choice; Risk Diversification; Income Risk (search for similar items in EconPapers)
JEL-codes: F13 F16 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:sie:siegen:126-06

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