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Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk

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  • John Heaton
  • Deborah Lucas

Abstract

Using cross‐sectional data from the SCF and Tax Model, we show that entrepreneurial income risk has a significant influence on portfolio choice and asset prices. We find that households with high and variable business income hold less wealth in stocks than other similarly wealthy households, although they constitute a significant fraction of the stockholding population. Similarly for nonentrepreneurs, holding stock in the firm where one works reduces the portfolio share of other common stocks. Finally, we show that adding proprietary income to a linear asset pricing model improves its performance over a similar model that includes only wage income.

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  • John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, June.
    • Handle: RePEc:bla:jfinan:v:55:y:2000:i:3:p:1163-1198
    DOI: 10.1111/0022-1082.00244
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