Trade policy and risk diversification

The paper analyses the influence of trade policies on the investment decisions of a representative individual. In particular, the increased uncertainty of future income is considered 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 increases 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, a effective hedge for the income risk is not possible in most of the observed scenarios. -- Protection ; Portfolio Choice ; Risk Diversication ; Income Risk