Household Portfolio Research Articles

Poverty in Europe: Sociodemographics, Portfolios, and Consumption of Wealth‐Poor Households

In this article, I describe the portfolio structure of poor households within the euro area (EA) using microdata from the Household Finance and Consumption Survey (HFCS), the Luxembourg Wealth Study (LWS), and the Luxembourg Income Study (LIS). My approach differs from existing ones in that I analyze the (net) wealth‐poor instead of the income‐poor households. I am able to identify households in the bottom net wealth decile and study their portfolio structure. From a methodological point of view, my study shows that a poverty indicator based on households’ net wealth needs to be designed and interpreted with great care. Given that wealth accumulates over time and (high‐ income) households can borrow against their future income stream, it is not clear whether low net wealth holdings are really indicative of being poor, for example, in the sense of material deprivation or consumption opportunities. As consumption can be financed from wealth and income, an indicator combining wealth and income may be a solution. I find significant heterogeneity in the portfolios of households in the bottom net wealth decile across countries. The characteristics of the group of households with low wealth are different across countries as well. Real assets are held by fewer less wealthy households than financial assets, and almost all wealth‐poor households own deposits and sight accounts, but only a few have mortgage debt. Wealth‐poor households are, on average, smaller than other households, and their heads are younger. Additionally, less wealthy households are not the unemployed households with low education levels. In some countries, highly educated household heads and full‐time employees belong to the wealth‐poor. The poor households spend, on average, about 20 percent of their gross income on food.

Editor's Letter

Editor-in-Chief Max J. Skidmore announces a forthcoming book and discusses an anticipated special issue of the journal, with the theme of childhood poverty in the Middle East. He also describes this current issue, Volume 9, Issue 3, of Poverty and Public Policy, the third quarterly issue of 2017, which continues the ninth year of the journal's publication. I am pleased to announce a forthcoming book that presents original essays by scholars from around the world, each from a different country, examining the first 100 days of the administration of Donald J. Trump as President of the United States. The volume will be co-edited by Dr. John Dixon, and by me. Dr. Dixon is familiar to readers of Poverty and Public Policy, both as a contributor and as Board member/Editor-at-Large. The Dixon-Skidmore volume should be in print early in 2018, and the publisher will be Westphalia Press, the publishing arm of the Policy Studies Organization. We also anticipate that we soon will be issuing a special issue of Poverty and Public Policy on the subject of “Child Poverty and Youth Unemployment in the Middle East.” Dr. Dixon will be the Special Editor for that issue. This current issue, volume 9, issue 3, begins with a Public Policy Report that I prepared with regard to the issuance on 13 July of the 2017 Report of the Trustees of the Social Security Administration. Poverty and Public Policy presents this as a public service to facilitate better understanding of the Social Security system in the United States. Next comes an article from Ethiopia, by Bekele Melese of the University of Gondar, who studies “Micro and Small Enterprises as an Anti-Poverty and Employment Generation Strategy in Bahir Dar City, North-Western Ethiopia.” Consistent with our conviction that education is among the most important anti-poverty factors, our next article, by Laura D. Ullrich of Winthrop University, considers “Differing Responses to School Finance Reform: The Haves Versus the Have-Nots.” This issue's next article also deals with children. Diana Rosales Mitte of the University of Wisconsin–Madison contributes “The Effects on Children's Well-Being of Ecuador's Conditional Cash Transfer ‘Bono de Desarrollo Humano’.” Yet another important article, “Poverty in Europe: Sociodemographics, Portfolios, and Consumption of Wealth Poor Households,” by Philip Müller of the University of Göttingen in Germany, analyzes microdata from three European studies to look at wealth-poor as opposed to income-poor households. In recognition of the importance of family planning to broad issues of poverty, we are proud to present as the final article in this issue, “The Relational Experience of Poverty: Challenges for Family Planning and Autonomy in Rural Areas,” by Elizabeth Seale of the State University of New York Oneonta. Book Reviews— This issue has three book reviews, each coming from the University of South Dakota. Sarah R. Deming reviews Intersectional Inequality: Race, Class, Test Scores, and Poverty, by Charles C. Ragin and Peer C. Fiss. Peter A. Kindle and Elena Delavega review Matthew Desmond's Evicted: Poverty and Profit in the American City. Victoria Varland reviews Richard Schweid's Invisible Nation: Homeless Families in America. We welcome their contributions. Reviews of relevant books are vital to the scholarly process. Thus, as always, we seek thoughtful reviews of such books, and we invite those who are interested in becoming reviewers to communicate with our Book Review Editor, Dr. Virginia Beard, at [email protected]. Max J. Skidmore Editor-in-Chief University of Missouri-Kansas City

Income and Wealth Inequality in America, 1949–2016

This paper introduces a new long-run data set based on archival data from historical waves of the Survey of Consumer Finances. Studying the joint distribution of household income and wealth, we expose the central importance of portfolio composition and asset prices for wealth dynamics in postwar America. Asset prices shift the wealth distribution because of systematic differences in household portfolios along the wealth distribution. Middle-class portfolios are dominated by housing, while rich households predominantly own business equity. Differential changes in equity and house prices shaped wealth dynamics in postwar America and decoupled the income and wealth distribution over extended periods.

Macroprudential Policy and Household Wealth Inequality

Macroprudential policies, such as caps on loan-to-value (LTV) ratios, have become part of the policy paradigm in emerging markets and advanced countries alike. Given that housing is the most important asset in household portfolios, relaxing or tightening access to mortgages may affect the distribution of household wealth in the country. In a stylised model we show that the final level of wealth inequality depends on the size of the LTV ratio, housing prices, credit cost and the strength of a bequest motive; ultimately with no unequivocal effect of LTV ratios on wealth inequality. These trade-offs are illustrated with estimations of Gini Recentered Influence Function regressions on household survey data from 12 eurozone countries that participated in the first wave of the Household Finance and Consumption Survey (HFCS). The results show that, among the households with active mortgages, high LTV ratios at the time of acquisition are related to high contributions to wealth inequality today, while house price increases are negatively related to inequality contributions. A proxy for the strength of bequest motives tends to be negatively related with wealth inequality, but credit cost does not show a significant link to the distribution of wealth.

Housing Ownership Decision Making in the Framework of Household Portfolio Choice

While it is well documented that homeowners have greater total wealth than renters, it is not clear that homeownership causes this wealth differential. We consider the buy versus rent decision in the framework of household portfolio choice. This allows us to determine whether owning a home increases the utility of households by improving the performance of their portfolio compared with households that rent. We determine that while renting is superior to ownership in isolation, homeownership as a part of the household portfolio often improves wealth creation on a risk-adjusted basis. Our findings suggest significant policy changes that currently favor levered homeownership strategies for households with minimal wealth.

Portfele aktywów finansowych gospodarstw domowych krajów strefy euro – podobieństwa i różnice

This paper presents the average financial asset portfolios of households in 15 countries of the euro area, identifying differences and similarities between them. Attention is also paid to the non-equal scale of financial exclusion of individuals from acquisitions of investment products. The households possessing such assets were characterised by diverse preferences in terms of their values and structures. Despite existing differences, the results allowed to identify the most important component of the portfolio on a supranational scale, which turned out to be deposits. The focus on this category of financial assets led to a poor diversification of portfolios, usually constituted by up to two components. There was observed a substitutability between certain products, however, not the same in the entire group of countries. Despite the multifaceted differences, the subgroups of countries with similar components were identified.

Behavioral Aspects of Household Portfolio Choice: Effects of Loss Aversion on Life Insurance Uptake and Savings

This paper investigates how loss-aversion affects individuals’ decisions on savings and insurance purchase. Specifically, this paper empirically tests if prospect theory’s loss aversion decreases insurance demand and increases savings demand. Prospect theory predicts that boundedly rational consumers may view pure protection insurance, such as term-life insurance, as a risky investment because the insured may lose premiums if a bad event does not occur within the pre-specified term. Hence, those who are fairly sensitive to the potential loss choose not to buy term-life insurance. Instead, they may choose a more safe option to prepare for uncertain future events by increasing precautionary saving. This paper tests such prediction using individual-level data from the Health and Retirement Study (HRS) and finds empirical evidence consistent with the prediction: loss-averse individuals are less likely to own term-life insurance and more likely to own whole-life insurance, which serves as a partial savings instrument. These individuals also hold a higher level of wealth than others, suggesting that they tend to save more (presumably for precautionary motives), all other things being equal.

A Study on the Determination of Household Portfolio Selection in China—Based on the Empirical Study on Households in the East

<p><em>Household exerts remarkable influence on the market-oriented economy. Regarding to the importance of household in financial market, the study on the determination of household investors’ portfolio selection has attracted tremendous attention of academic circle in recent decades. China Household Finance Survey (CHFS) has been established to conduct household finance research and it suggests that household investors’ asset allocation has been diversified in the recent decade with the prosperity of financial market and the booming household income. The study here aims to find out which determinations exerting effects on financial asset selection of Chinese household and the paths of the mechanism.</em></p><p><em>The paper will conduct both theoretical analysis and statistical analysis. With the help of Stata 12 and Eview 7.2 metrology software, the paper analyzes the influential factors of household financial asset selection and the interactional relationship among the hypothesized variables. Based on the empirical results and conclusions, the study can provide practical suggestion to household investor, asset manager and government.</em></p>

Household Retirement Savings: The Location of Savings between Spouses

Retirement planning is often a joint household decision-making process, and therefore the household is often the more appropriate unit of analysis. However, retirement savings in tax advantaged accounts are held in the name of one individual. While spouses have rights to these assets in the case of divorce and in most cases of death, the separation of accounts in name may cause couples to treat their accounts as separate, with each spouse making decisions separately. In order to optimize retirement planning, couples should consider the entire household portfolio together, accounting for the characteristics of the retirement accounts, the age of the spouses, and income differences between spouses. With separate accounts, one spouse may not be aware of the contributions or assets accumulated in the other spouse’s accounts. This may lead to sub-optimal decision-making, as individuals in a couple may not fully optimize across all available retirement accounts. Little is known about how households divide retirement contributions and assets between spouses. In this project, we investigate how households locate contributions across tax deferred savings accounts that are nominally held in one spouse’s name and how these decisions may impact accumulated assets. In particular we first document who within a couple nominally holds retirement assets. Using data from the Health and Retirement Study and Survey of Consumer Finances, we find that household retirement assets and contributions are more likely to be located in accounts held in the husband’s name or the primary earner’s name. In our regression analysis, we find that the location of contributions is largely driven by the distribution of earnings within couples.

Algorithmic portfolio choice: lessons from panel survey data

Automated asset management offerings algorithmically assign risky portfolios to individual investors based on investor characteristics such as age, net income, or self-assessment of risk aversion. Using new German household panel data, we investigate the key household characteristics that drive private asset allocation decisions. This information allows us to assess which set of variables should be included in algorithmic portfolio advice. Using heavily cross-validated classification trees, we find that a combination of household balance sheet variables—describing the ability to take risks (e.g., net wealth)—and household personal characteristics—describing the willingness to take risks (e.g., risk aversion)—best explain the cross-sectional variation in household portfolio choice. Our empirical evidence is in line with models of portfolio choice under decreasing relative risk aversion and fixed investment costs. The results suggest the utility of a more holistic modeling of household characteristics. Including background risks in the form of household leverage not only makes investment sense, but is also the new regulatory reality under MIFID II rules. Robo-advisors are strongly advised to act accordingly.

Impact of Population Aging on Household Savings and Portfolio Choice in Japan

We examine whether Japanese households have begun to dissave and reduce their holdings of risky assets because of population aging over the period 2000–14. While there is little doubt that household savings have decreased, the true trend without a negative income shock in the early 2000s would have been declining more smoothly and moderately. The average share of risky assets in household portfolios increases with age and barely decreases even for retired households. The main sources of increasing household wealth are the increasing wealth of the elderly and the increasing proportion of the wealthier elderly population.

Household risk aversion and portfolio choices

In practice, stock investment is one of the most important decisions made by households. The primary goal of this paper is to explain family investment decisions under the assumptions of household member’s preferences and efficient risk sharing based on the collective household model. In particular, by examining the absolute (relative) risk aversion of the household welfare function, we demonstrate how household’s portfolio allocation in stocks changes with family wealth. We examine two types of preference heterogeneity between family members: parameter heterogeneity and functional form heterogeneity. This study offers an alternative explanation of household portfolio choice corresponding with the observation that wealthier households tend to hold greater share of their wealth in risky assets. Specifically, if two decision-makers have standard constant relative risk aversion preference with different relative risk aversions in a household, family’s relative risk aversion decreases as household wealth increases (decreasing relative risk aversion).

The Impact of Major Life Events on Australian Household Financial Decision-Making and Portfolio Rebalancing

This paper uses household-level longitudinal data from the Household, Income, and Labour Dynamics in Australia (HILDA) survey to gain insights into the asset portfolio rebalancing responses of households experiencing a severe financial shock. The four major life events we consider are serious illness or injury, death of a spouse, being fired or made redundant, and separation from a spouse. The eleven asset classes are bank accounts, cash investments, equities, superannuation (pensions), cash-in values of life insurance policies, trust funds, owner-occupied housing, investor housing, business assets, vehicles, and collectibles. We use static Tobit models to assess the impact of the life events on asset class shares in household portfolios and dynamic Tobit models to investigate the magnitude and duration of the financial shocks over time. We find that serious illness and injury, loss of employment, and separation cause households to rebalance portfolios in ways that have detrimental impacts on long-term wealth accumulation. In particular, when households experience illness/injury or employment loss, they tend to reduce their equity portfolio share in both the short- and long-term with the implication of reduced portfolio returns, while those that experience separation reduce the portfolio share of owner-occupied housing also immediately, but then increase it over the longer term, thereby causing concern about transaction costs. The insights gained from these studies are particularly important for financial planners, as it may be possible to hedge wealth adverse impacts through better financial education, insurance products, or general financial preparedness.

Housing and the Tax System: How Large Are the Distortions in the Euro Area?

This paper presents new evidence on the impact of the preferential treatment of owner-occupied housing in Europe. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 percent compared to the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 percent of the value of owner-occupied housing, or about 30 percent of financial asset holdings in household portfolios. The bulk of the subsidies stems from under-taxation of the return to home equity, while the average contribution of the tax rebate for mortgage interest payments is driven down by relatively low loanto-value ratios in the data. However, at the margin, the tax–induced incentive to use mortgage debt to finance the purchase of the main residence is sizable.

Macroprudential Policy and Household Wealth Inequality

Macroprudential policies, such as caps on loan-to-value (LTV) ratios, have become part of the policy paradigm in emerging markets and advanced countries alike. Given that housing is the most important asset in household portfolios, relaxing or tightening access to mortgages may affect the distribution of household wealth in the country. In a stylised model we show that the final level of wealth inequality depends on the size of the LTV ratio, housing prices, credit cost and the strength of a bequest motive; ultimately with no unequivocal effect of LTV ratios on wealth inequality. These trade-offs are illustrated with estimations of Gini Recentered Influence Function regressions on household survey data from 12 Eurozone countries that participated in the first wave of the Household Finance and Consumption Survey (HFCS). The results show that, among the households with active mortgages, high LTV ratios at the time of acquisition are related to high contributions to wealth inequality today, while house price increases are negatively related to inequality contributions. A proxy for the strength of bequest motives tends to be negatively related with wealth inequality, but credit cost does not show a significant link to the distribution of wealth.

Does Bankruptcy Protection Affect Risk-Taking in Household Portfolios?

This paper examines empirically the causal effect of personal bankruptcy provisions on stock market participation. The bankruptcy insurance could induce financial risk-taking by reducing exposure to uninsurable, background risks. Exploiting the time variation in home equity protection, I find that stock ownership increases when bankruptcy protection is low. At intermediate protection levels ownership declines because unprotected assets become less attractive. The effects are restricted to wealthier households, facing relatively lower entry and participation costs. These findings highlight unintended consequences of social programs on household financial decisions.

Household Portfolio Choice, Reference Dependence, and the Marriage Market

This paper bridges the financial market and the marriage market using a reference-dependent mechanism. Male-biased sex ratios induce families with sons to hold more risky assets, since competitive marital payment in a tight market raises the reference level of marriage expenditure for such families. Using the 2013 China Household Finance Survey data, we find that a 0.1 increase in the sex ratio raises the probability of participating in the stock market by 25.7 percent, or the stock share of liquid wealth by 42.7 percent for families with a son; there appears no effect for families with a daughter.

The home bias of the poor: Foreign asset portfolios across the wealth distribution

This paper documents how the share of foreign stocks in US household portfolios rises with the ratio of financial wealth to non-financial income. This is both because wealthier households are more likely to participate in foreign asset markets, and because portfolio shares of participants increase with financial wealth but decrease with non-financial income. A simple, standard two-country general equilibrium model shows that hedging of terms of trade movements and non-financial income risk produces non-trivial heterogeneity in portfolios across the wealth and income distribution within countries that is qualitatively in line with this evidence.

How Do Homeowners Choose Between Fixed and Adjustable Rate Mortgages?

Housing is the most important asset in the portfolio of most households. Understanding the households’ decision on housing finance has important implications from a policy perspective, due to the effects it may have on the housing prices, on the housing market stability and on household welfare. The theoretical literature on housing finance focused on figuring out the optimal choice between fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs). We argue that the standard economic criteria are sometimes inadequate to explain household’s choices, which may be motivated by psychological factors. In other words, we claim that household’s choice depends only partially on the findings of the theoretical literature. We examine the effect of changes in the short-term market interest rate on the households’ choice between FRMs and ARMs. We test this effect using a unique data provided to us by the Bank of Israel, which contains detailed information on the household’s decision between FRM and ARM contracts in Israel in the past decade. The results of our analysis demonstrate a significant association between FRM preference and short-term interest rate reduction. Moreover, we find that the change in the short-term interest rate is more salient to the borrowers in periods of a high interest rate environment. We attribute these findings to Tversky and Kahneman (1974) availability and representativeness heuristics.

Limited Marital Commitment and Household Portfolios

This paper examines the link between marital decisions, consumption, and optimal portfolio choice in a life-cycle model with limited marital commitment. Without full commitment, individual income shocks lead to renegotiation between spouses, altering relative bargaining power and endogenously generating time-varying risk aversion at the household-level. Consequently, changes in relative income are associated with significant shifts in household portfolios. We find strong support for this prediction using data from the PSID. The model can also rationalize the link between marital transitions and portfolio allocations observed in the data. Finally, the risk-sharing benefits of marriage imply a positive link between wealth and risky asset holdings across households.