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Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden

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  • SYLVAIN CATHERINE
  • PAOLO SODINI
  • YAPEI ZHANG

Abstract

Using Swedish administrative panel data, we document that workers facing higher left‐tail income risk when equity markets perform poorly have lower portfolio equity share. In line with theory, the relationship between cyclical skewness and stock holdings increases with the share of human capital in a worker's total wealth and vanishes as workers get closer to retirement. Cyclical skewness also predicts portfolio differences within pairs of identical twins. Our findings show that households hedge against correlated tail risks, an important mechanism in asset pricing and portfolio choice models.

Suggested Citation

  • Sylvain Catherine & Paolo Sodini & Yapei Zhang, 2024. "Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden," Journal of Finance, American Finance Association, vol. 79(3), pages 1755-1788, June.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:3:p:1755-1788
    DOI: 10.1111/jofi.13341
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