Uncertainty and household portfolio choice : Evidence from South Korea

Abstract

We examine the effect of policy uncertainty on household portfolio choice using the Korea Labor and Income Panel Study (KLIPS). Policy uncertainty significantly reduces the amount of risky assets in a household’s portfolio on both extensive and intensive margins. Individual heterogeneity is controlled using a risk-tolerance variable. Furthermore, we estimate heterogeneous effects of the policy uncertainty on portfolio choices of households across different levels of income volatility. It turns out that households with higher levels of labor income volatility tend to respond less to aggregate policy uncertainty.