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Portfolio Choice in the Presence of Background Risk

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  • Heaton, John
  • Lucas, Deborah

Abstract

In this paper, we focus on how the presence of background risks--from sources such as labour and entrepreneurial income--influences portfolio allocations. This interaction is explored in a theoretical model that is calibrated using cross-sectional data from a variety of sources. The model is shown to be consistent with some but not all aspects of cross-sectional observations of portfolio holdings. The paper also provides a survey of the extensive theoretical and empirical literature on portfolio choice.

Suggested Citation

  • Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
    • Handle: RePEc:ecj:econjl:v:110:y:2000:i:460:p:1-26
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