Share Of Risky Assets Research Articles

Fight Or Flight? Portfolio Rebalancing by Individual Investors*

This paper investigates the dynamics of individual portfolios in a unique dataset containing the disaggregated wealth of all households in Sweden. Between 1999 and 2002, we observe little aggregate rebalancing in the financial portfolio of participants. These patterns conceal strong household-level evidence of active rebalancing, which on average offsets about one half of idiosyncratic passive variations in the risky asset share. Wealthy, educated investors with better diversified portfolios tend to rebalance more actively. We found some evidence that households rebalance towards a higher risky share as they become richer. We also study the decisions to trade individual assets. Households are more likely to fully sell directly held stocks if those stocks have performed well, and more likely to exit direct stockholding if their stock portfolios have performed well; but these relationships are much weaker for mutual funds, a pattern which is consistent with previous research on the disposition effect among direct stockholders and performance sensitivity among mutual fund investors. When households continue to hold individual assets, however, they rebalance both stocks and mutual funds to offset about one sixth of the passive variations in individual asset shares. Households rebalance primarily by adjusting purchases of risky assets if their risky portfolios have performed poorly, and by adjusting both fund purchases and full sales of stocks if their risky portfolios have performed well. Finally, the tendency for households to fully sell winning stocks is weaker for wealthy investors with diversified portfolios of individual stocks.

Investment Horizon, Labor Income, and Portfolio Choice of Private Investors

I empirically investigate the impact of age and self-reported planning horizon on asset allocation decisions for a broad cross-section of individual investors. I find that age and investment horizon play different roles in determining investors' risky portfolios. When risky investments include real estate, the share of risky assets declines with age. Planning horizon tends to influence only investments in financial risky assets, such as stocks, options, and mutual funds. A longer planning horizon leads to an increasing share of risky financial investments, independent of investors' age.

Asset Management, Human Capital, and the Market for Risky Assets

Conventional finance models treat risky‐asset prices as “fully (information) revealing.” Less work exists on how prices become information revealing. Our answer focuses on the micro foundations of information acquisition and the role of human capital in “asset management.” We derive testable propositions on how education and the opportunity cost of asset management affect risky‐asset demand, portfolio returns, asset‐price volatility, and equity premiums. Using micro‐level data, we find that education raises the portfolio share of risky assets and overall portfolio returns, whereas wage rates exert opposite effects. We find that the rate of return to education in generating nonwage income is nontrivial.

Wealth Shocks and Risk Aversion

Modern literature departs from time-separable constant relative risk aversion preferences to explain asset pricing facts. This deviation typically implies that wealth shocks generate transitory variations in agents’ relative risk aversion and, possibly, portfolio re-allocations over time. I empirically analyze this relationship using U.S. macroeconomic data and and evidence for time-variation in portfolio shares that is consistent with counter-cyclical risk aversion. These results suggest, therefore, that wealth-dependent, habit-formation or loss and disappointment aversion utility functions are a good description of preferences. Controlling for observed versus expected asset returns, I also show that: (i) wealth effects are significant (although temporary) and there is no evidence of inertia contrary to Brunnermeier and Nagel (2006); and (ii) the consumption-wealth ratio (Lettau and Ludvigson, 2001), the labor income risk (Julliard, 2004) and the labor income-consumption ratio (Santos and Veronesi, 2006) partially explain changes in the risky asset share.

Does Health Affect Portfolio Choice?

Previous studies find a strong and positive empirical connection between health status and the share of risky assets held in household portfolios. But is this relationship truly causal, in the sense that households respond to changes in health by altering their portfolio allocation, or does it simply reflect unobserved differences across households? We find that most of the variation by health is on the extensive margin of stock ownership (rather than the marginal allocation conditional on ownership), which more plausibly points to non-causal explanations. Moreover, we find that any link between health and risky assets depends crucially on the econometric treatment of unobserved heterogeneity. Once we account adequately for unobserved household differences, there is no longer a statistically significant relationship between any of our health measures and household portfolio decisions.

Fight or Flight? Portfolio Rebalancing by Individual Investors

This paper investigates the dynamics of individual portfolios in a unique dataset containing the disaggregated wealth and income of all households in Sweden. Between 1999 and 2002, stockmarket participation slightly increased but the average share of risky assets in the financial portfolio of participants fell moderately, implying little aggregate rebalancing in response to the decline in risky asset prices during this period. We show that these aggregate results conceal strong household-level evidence of active rebalancing, which on average offsets about one half of idiosyncratic passive variations in the risky asset share. Sophisticated households with greater education, wealth, and income, and holding better diversified portfolios, tend to rebalance more aggressively. We also study the decisions to enter and exit risky financial markets. More sophisticated households are more likely to enter, and less likely to exit. Portfolio characteristics and performance also influence exit decisions. Households with poorly diversified portfolios and poor returns on their mutual funds are more likely to exit; however, consistent with the literature on the disposition effect, households with poor returns on their directly held stocks are less likely to exit.

Effects of decision interval on optimal intertemporal portfolios with serially correlated returns

This paper considers portfolio choice when decisions are made for several future time periods all at once. The risky asset share sequence must be precommitted for the entire decision interval, either constrained (as in Samuelson (1991)) or not constrained (as in Balvers and Mitchell (2000)) to be constant across time periods within the interval. For a broad, plausible class of dynamic returns processes, contrary to Samuelson, under log utility the decisions for the more distant future are more conservative. This class is exemplified by autocorrelated ARMA(p,q) processes and finite-state Markov processes. The source of Samuelson’s contrary result is elucidated.