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Heterogeneous Background Risks and Portfolio Choice: Evidence from Micro‐level Data

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  • DARIUS PALIA
  • YAXUAN QI
  • YANGRU WU

Abstract

We construct a set of household‐level background risk variables to capture the covariance structure of three nonfinancial assets and two financial assets. These risks are in general statistically significant and economically important for a household's stock market participation and stockholdings. A one‐standard‐deviation increase in background risks reduces the participation probability by 11% and the stockholdings‐to‐wealth ratio by 4%. The volatilities of labor income, housing value, and business income reduce a household's participation and stockholdings. A household with labor income highly correlated with stock (bond) returns is less (more) likely to invest in stock.

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  • Darius Palia & Yaxuan Qi & Yangru Wu, 2014. "Heterogeneous Background Risks and Portfolio Choice: Evidence from Micro‐level Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1687-1720, December.
    • Handle: RePEc:wly:jmoncb:v:46:y:2014:i:8:p:1687-1720
    DOI: 10.1111/jmcb.12163
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