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Tail risks in household finance

Author

Listed:
  • Ardakani, Omid M.
  • Ajina, Rawan

Abstract

We introduce a measure to quantify shared information within household financial portfolios under extreme events. We employ mutual information and copula entropy to capture tail dependencies among investment assets. We then study the impact of socio-economic factors on proactive financial behaviors using data from the 2022 Survey of Consumer Finances and highlight the necessity for tail-informed diversification strategies. Our findings underscore the importance of accounting for nonlinear dependencies to safeguard against unanticipated risks in extreme market scenarios.

Suggested Citation

  • Ardakani, Omid M. & Ajina, Rawan, 2024. "Tail risks in household finance," Finance Research Letters, Elsevier, vol. 69(PA).
    • Handle: RePEc:eee:finlet:v:69:y:2024:i:pa:s154461232401095x
    DOI: 10.1016/j.frl.2024.106065
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    More about this item

    Keywords

    Copula models; Extreme value theory; Financial dependencies; Household finance; Information theory; Tail risk;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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