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Revisiting the composition puzzles of the household portfolio: New evidence

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  • Jin, Fangyi

Abstract

This paper presents new evidence which contradicts the existence of the portfolio composition puzzles concerning household finance: portfolio risk increases empirically with age and wealth which contradicts Merton's (1971) solution. The puzzles cause serious problems when assessing the classical theoretical models that have been developed to rationalize households' portfolio choices. This paper investigates the 2005 Panel Study of Income Dynamics (PSID) data and shows that, when the household portfolio includes real estate and private business and allows for leverage, the portfolio risk for young and low-wealth households is in general higher than that in older and richer households, which is consistent with the predictions of classical models.

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  • Jin, Fangyi, 2011. "Revisiting the composition puzzles of the household portfolio: New evidence," Review of Financial Economics, Elsevier, vol. 20(2), pages 63-73, May.
    • Handle: RePEc:eee:revfin:v:20:y:2011:i:2:p:63-73
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    Cited by:

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    2. Huang, MeiChi, 2018. "Time-varying diversification strategies: The roles of state-level housing assets in optimal portfolios," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 145-172.
    3. Callado Muñoz, Francisco Jose & González Chapela, Jorge & Utrero González, Natalia, 2014. "Analysis of deviance in household financial portfolio choice: evidence from Spain," MPRA Paper 57497, University Library of Munich, Germany.
    4. Xiaonan Chen & Jianfeng Song, 2022. "Influence Path Analysis of Rural Household Portfolio Selection: A Empirical Study Using Structural Equation Modelling Method," The Journal of Real Estate Finance and Economics, Springer, vol. 64(2), pages 298-322, February.
    5. Kazufumi Yamana, 2016. "Structural Household Finance," Discussion papers ron279, Policy Research Institute, Ministry of Finance Japan.
    6. Sofia Vale & Francisco Camões, 2017. "Housing valuation, wealth perception, and households’ portfolio composition," EcoMod2017 10565, EcoMod.

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