Share Of Risky Assets Research Articles

China’s public long-term care insurance and risky asset allocation among elderly households

China’s elderly households are characterized by higher holdings of cash and cash equivalents and lower holdings of stocks and bonds in their financial portfolios. We utilize the public Long-term Care Insurance (LTCI) reform and data from the China Health and Retirement Longitudinal Study (CHARLS) to examine how LTCI coverage affects risky asset holdings among newly insured elderly households. Employing a difference-in-differences methodology, our findings reveal that LTCI significantly increases the share of risky assets in the financial portfolios of older families. The increased preference for risky assets may be a result of a weakening incentive for precautionary savings. Decomposing risky assets into bonds and stocks, we find that the increase in the share of risky assets following the LTCI pilot comes mainly from bond investments rather than stocks, which indicates that LTCI has a limited effect on risk asset holdings among the Chinese elderly. Our study contributes to understanding the economic impacts of China’s public LTCI by showing that LTCI may lead to changes in asset allocation strategies among elderly households.

Does childhood adversity affect household portfolio decisions? Evidence from the Chinese Great Famine

We employ the 1959–1961 Chinese Great Famine as a quasi-natural experiment to examine the relationship between experiencing adversity in childhood and financial decisions in adulthood. Using data from the 2017 China Household Finance Survey and the intensity of excess deaths during the Great Famine, results from our preferred two-part fractional regression model suggest that, for an additional excess death per thousand people during the Famine, cohorts who were in their infancy and early childhood during the Famine are 0.2–0.3 percentage points less likely to hold risky financial assets than other cohorts. We also find that, conditional on the decision to hold risky assets, those who experienced an additional excess death per thousand people during the Famine in their middle to late childhood hold 1.1 percentage points higher share of risky assets in their household financial portfolios than those who did not experience the Famine. We explore several potential mechanisms and find that financial literacy, risk-taking preferences and locus of control are channels through which childhood adversity in the famine years affects household portfolio decisions. Our findings are robust to a series of sensitivity checks.

Home, unsweet home – effect of homeownership on financial investments of Indian households

PurposeThe study analyzes the relationship between homeownership and financial investment of households in the context of emerging markets like India. It also examines how homeownership affects the portfolio decisions of Indian households.Design/methodology/approachUsing the nationally representative All-India Debt and Investment Survey of 2019 and employing an instrumental variable approach, the authors analyze the relationship between homeownership and the share of financial assets held by Indian households. The study also employs several sensitivity checks, including alternate estimation techniques and alternative definitions of the housing variables, and accounts for additional factors to ensure that the authors are able to capture the effect of homeownership on the outcome variable.FindingsThe analysis suggests homeownership crowds out financial investment in India due to high repair and maintenance costs. The negative effect is mainly observed in urban households. Further, the findings imply that homeownership leads households to reallocate their asset portfolio. Homeowners have a lower share in liquid short term deposits, indicating the high liquidity risk of their portfolios. On the other hand, homeownership increases the share of long term retirement funds along with no effect on risky asset share. The authors observe that the crowding out effect is more striking for younger households and poorer households with low income, and the effect is lower for indebted households.Practical implicationsThe findings underscore the need for financial awareness programs so that housing does not crowd out liquid investments of households. Additionally, the results highlight that policies should first focus on young and poor households as the negative effect is more prominent for these groups. Finally, there is scope for policies to support repair and maintenance costs incurred by vulnerable households to reduce the negative effect of housing on liquid financial investments.Originality/valueThis paper is among the few studies that provide insights into how homeownership relates to financial investment and portfolio decisions in the context of an emerging economy. Furthermore, the heterogeneous effects based on poor economic status and age underscore the need for complementary policies.

Household portfolio choice before and after a house purchase

AbstractUsing a unique administrative panel data from Denmark, this article documents the dynamic evolution of households' financial wealth, the equity market participation rate (extensive margin), and the conditional risky asset share of financial wealth (intensive margin) over a 7‐year period around a house purchase. We find that households' equity market participation rate falls during the year of house purchase. Conditional on participation, the risky asset share of financial wealth follows a V‐shape around the house purchase. It decreases and reaches the lowest point 1 year before a house purchase, but jumps up immediately after. This finding suggests that of the three channels identified in the literature that are related to the risky asset demand after a house purchase, the debt retirement channel and the diversification effect dominate the liquidity concern.

Relative deprivation and financial risk taking✰

This study examines whether relative deprivation is associated with risk preference and behavior. Relative deprivation measured by the Yitzhaki and Deaton indices and financial risk-taking outcomes are obtained from a representative household survey of Korean adults. Results show that relative deprivation is negatively associated with risk aversion, and this association is significant for men and individuals who experienced increasing relative deprivation. However, relative deprivation is not associated with investment outcomes such as risky asset ownership and risky asset share of financial net worth. These results are consistent with reference-dependent preference and social-comparison model that incorporates social standing into utility function.

The fluctuations of insurers’ risk appetite

The risk appetite of insurance companies fluctuates over time in a quasi cyclical fashion. When their capitalization is high (low), companies choose portfolios with a high (small) share of risky assets. We show that this phenomenon has the same source as the underwriting cycle, namely recapitalization costs. We build a dynamic stochastic general equilibrium model of the insurance sector where financial frictions prevent companies from maintaining a target leverage. Portfolio decisions of insurers fluctuate with their aggregate capitalization. The model rationalizes two apparently disjoint pieces of evidence: long-standing empirical evidence on underwriting cycles and more recent evidence on the fluctuations of insurance companies’ risk appetite.

Individuals’ financial risk-taking and peer influence

Individual investor’s risky asset share, as well as stock market participants’ choice of total- and systematic stock portfolio risk, are found to be affected by financial risk-taking among peers. Furthermore, the results indicate that the influence of peers is stronger for less wealthy, for those with relatively higher disposable incomes, and for male investors, respectively. The results, obtained using an instrumental variable approach based on analysis of detailed individual level data, are robust towards a number of competing explanations and stress that interaction with peers’ is an important channel through which individuals’ overall financial risk-taking is affected.

Forced retirement risk and portfolio choice

Abstract Current literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using data from the Health and Retirement Study, this paper finds that the forced retirement risk is both significant and highly correlated with stock market fluctuations. Using a life-cycle portfolio choice model, this paper shows that forced retirement risk makes labor income near retirement stock-like. Therefore, contrary to conventional wisdom, those who are still working but near retirement should have a lower share of risky assets in their financial portfolios than retirees do.

Risk Aversion and the Elasticity of Intertemporal Substitution among Australian Households

This paper explores the degree of risk aversion amonsg Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) Survey. Using households' share of risky assets, we test whether relative risk aversion is constant in wealth. After accounting for measurement error, we cannot reject the constant relative risk aversion (CRRA) assumption. Using a CRRA utility function, we estimate the elasticity of intertemporal substitution and infer a coefficient of relative risk aversion of 1.2 to 1.4. These findings can provide guidance for calibrating household preferences in macroeconomic models of the Australian economy.

Income Volatility and Portfolio Choices

Based on administrative data from Statistics Norway, we find economically significant shifts in households' financial portfolios around structural breaks in income volatility. When the standard deviation of labor-income growth doubles, the share of risky assets decreases by 4 percentage points. We ask whether this estimated marginal effect is consistent with a standard model of portfolio choice with idiosyncratic volatility shocks. The standard model generates a much more aggressive portfolio response than we see in the data. We show that Bayesian learning about the underlying volatility regime can reconcile the gap between the model and the data.

Trust and Household Portfolios

This article provides empirical evidence on the existence and the extent of the influence of trust in financial decisions using individual data on Italian households from the Survey on Household Income and Wealth, 2010. This article studies the relationship between, trust in people, trust in banks and more detailed previously unexplored dimensions of trust, and household financial portfolio decisions. The article provides empirical evidence that trust in people and trust in banks affect both participation in financial markets, the share of risky assets and the diversification of the financial portfolio, controlling socio-demographic factors, risk aversion, and financial literacy as well. The article finds that trust is important for individuals with a lower level of education who have limited possibilities to acquire and process information on financial markets need to rely in trustworthy relationship to define their financial portfolio. Further, we present evidence that the main channel by which trust affects financial decision making and determines too little participation, a lower share of risky assets in the financial wealth and poorly diversified portfolios is trust in family and friends.

Risk Preferences and Efficiency of Household Portfolios

We propose a novel approach to infer investors' risk preferences from their portfolio choices, and then use the implied risk preferences to measure the efficiency of investment portfolios. We analyze a dataset spanning a period of six years, consisting of end of month stock trading records, along with investors' demographic information and self-assessed financial knowledge. Unlike estimates of risk aversion based on the share of risky assets, our statistical analysis suggests that the implied risk aversion coefficient of an investor increases with her wealth and financial literacy. Portfolio diversification, Sharpe ratio, and expected portfolio returns correlate positively with the efficiency of the portfolio, whereas a higher standard deviation reduces the efficiency of the portfolio. We find that affluent and financially educated investors as well as those holding retirement related accounts hold more efficient portfolios.

Unintended Benefits of Employment Protection Laws: Households Increased Risk-taking Behavior

Using the staggered exogenous adoption of US state-level labor protection laws and longitudinal survey data, I provide novel findings on the effect of employment protection laws on households' portfolio choices. I find that households increase the share of risky assets in financial wealth by 8.9% following the adoption of these laws. Stock market participation accounting for indirect investment also increases one year after the adoption. These effects are stronger for households with a higher unemployment risk, associated with young and low-income households. The exact opposite risk-taking behaviors are observed when the law is reversed. I also find that already discharged households at the time of the adoption reduce their stock holding and participation after the adoption. The adoption of the law contributes to wealth accumulation: purchases of stocks following the laws lead to 7% increase in the total equity value five years after trades. Finally, households are more likely to invest in out-of-state stocks than in-state stocks after the adoption, reducing investors' local-bias. Overall, the findings imply the economic and statistical significance of employment protection laws in effectively inducing households to take more financial risk, thereby improving wealth accumulation. This is an indirect social benefit of the employment protection law.

Risk Aversion Among Australian Households

This paper explores risk aversion among Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) survey. Using households’ share of risky assets, we test whether relative risk aversion is constant in wealth. After accounting for measurement error, we cannot reject the constant relative risk aversion (CRRA) assumption. Using an Euler equation that adjusts for measurement error in consumption data, we estimate the coefficient of relative risk aversion in the CRRA utility function. Point estimates from our preferred non-linear models suggest a moderate degree of risk aversion for the typical Australian household, with values ranging from 1.2 to 1.4. These findings can provide guidance for calibrating household preferences in macroeconomic models of the Australian economy.

Risk Aversion Among Australian Households

This paper explores risk aversion among Australian households using panel data from the Household Income and Labour Dynamics in Australia (HILDA) survey. Using households’ share of risky assets, we test whether relative risk aversion is constant in wealth. After accounting for measurement error, we cannot reject the constant relative risk aversion (CRRA) assumption. Using an Euler equation that adjusts for measurement error in consumption data, we estimate the coefficient of relative risk aversion in the CRRA utility function. Point estimates from our preferred non-linear models suggest a moderate degree of risk aversion for the typical Australian household, with values ranging from 1.2 to 1.4. These findings can provide guidance for calibrating household preferences in macroeconomic models of the Australian economy.

Risk-taking Channel of Monetary Policy: Evidence from Indian Banking

Some recent articles have studied the link between the central bank’s monetary policy stance and the risk-taking behaviour of banks in the context of advanced economies. Loose monetary policy can encourage banks to reach for yield, which will increase their share of risky assets, and also induce them to use more short-term funding. We empirically examine the existence of this risk-taking channel of monetary policy transmission in India. We find that expansionary monetary policy may increase default risk particularly for foreign banks and new private sector banks. We also find that tightening of monetary policy leads to lower liquidity risk and market risk and the effects are stronger for foreign banks than for other bank groups. In terms of market risk, the effect on foreign banks is weaker in cases of monetary tightening compared to expansion. JEL Classification: G21, G28, G32

Censored Fractional Response Model: Estimating Heterogeneous Relative Risk Aversion of European Households

This paper estimates relative risk aversion using the observed share of risky assets and characteristics of households. By assuming a participation cost of risky asset market and treating zero risky shares as a result of heterogeneous self-censoring, I estimate relative risk aversion and participation cost using a working sample with both participants and non-participants. This paper proposes a censored fractional response model to address the fact that risky share is a fractional response variable belonging to unity interval, and uses extremal quantile regression to estimate censoring thresholds. Empirical results show that the representative relative risk aversion is 30% to 70% higher than previously empirical evidence. The median relative risk aversion of eight Euro-zone countries range from 4.6 to 13.6, suggesting high international heterogeneity.

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.

Home Ownership and Household Portfolio Choice

We study the effect of home equity and indebtedness on financial portfolio choices of Dutch households during the period 2006-2012. Using a large administrative dataset at the household level we estimate how home equity and the outstanding mortgage amount influence the share of liquid assets held in stocks. We apply different econometric methods to take selection and endogeneity into account. In our preferred specifications both home equity and the household’s amount of mortgage debt have a non-significant impact on the risky asset share.

Risk Capacity over the Life Cycle: The Role of Human Capital, High Priority Goals, and Discretionary Wealth

From the perspective of wealth management, life cycle theoretical models suggest that the total portfolio, including human capital, should play an influential role in determining the composition of financial assets. In fact, by incorporating human capital into portfolio choice optimization, investors become wealthier, holding a respectable amount of safe assets. Young investors should be invested in stocks, and the risky asset share is expected to decline as individuals convert their human wealth into financial capital. Unfortunately, these academic recommendations and popular wisdom are inconsistent with the empirical observations on portfolio choice at an international level. In this article, stylized facts on income and saving patterns over the life cycle are presented, providing evidence that human wealth should be hump-shaped; younger workers, who do not have substantial wealth, have to implement a hierarchy of saving goals. Discretionary wealth to invest aggressively in the stock markets is present only during the years of middle-aged prosperity. The glide path used by the actual target-date funds in retirement plans needs to be reconsidered. <b>TOPICS:</b>Retirement, portfolio construction