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Modelling optimal asset allocation when households experience health shocks

Author

Listed:
  • Jiapeng Liu

    (China Jiliang University)

  • Rui Lu

    (Sun Yat-Sen University)

  • Ronghua Yi

    (China Jiliang University)

  • Ting Zhang

    (University of Dayton)

Abstract

Health status is an important factor in household portfolio decision-making. We develop a theoretical framework to model how households make optimal asset allocation decisions in response to health risks. Our two- and three-asset models both suggest that the maximum utility is derived when households allocate a majority of their assets to human capital. When households experience acute illness shocks, their welfare and portfolio values reduce, and they need to increase their investment in human capital. When an expensive health catastrophe befalls member(s) of households, the optimal decision for asset-rich households is to undertake medical treatment, whereas for asset-poor households it is to forgo treatment. Asset-poor households in particular require public financial assistance to enable them to invest in human capital.

Suggested Citation

  • Jiapeng Liu & Rui Lu & Ronghua Yi & Ting Zhang, 2017. "Modelling optimal asset allocation when households experience health shocks," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 245-261, July.
    • Handle: RePEc:kap:rqfnac:v:49:y:2017:i:1:d:10.1007_s11156-016-0589-6
    DOI: 10.1007/s11156-016-0589-6
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    Cited by:

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    2. Steven James Lee, 2021. "Does Fixed Income Buffer against Fraud Shocks?," JRFM, MDPI, vol. 14(10), pages 1-22, October.

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    More about this item

    Keywords

    Households; Health shocks; Asset allocation; Human capital; Public assistance;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G1 - Financial Economics - - General Financial Markets
    • I1 - Health, Education, and Welfare - - Health
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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