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Wealth and Portfolio Composition: Theory and Evidence

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  • King, Mervyn
  • Leape, Jonathan

Abstract

In this paper, we examine a new survey of 6,010 United States households and estimate a model for the allocation of total net worth among different assets. The paper has three main aims. The first is to investigate the extent to which a conventional portfolio choice model can explain the differences in portfolio composition among households. Our survey data show that most households hold only a subset of the available assets. Hence we analyze a model in which investors choose to hold incomplete portfolios. We show that the empirical specification of the joint discrete and continuous choice that characterizes household portfolio behaviour is a switching regressions model with endogenous switching. The second aim is to examine the impact of taxes on portfolio composition. The survey contains a great deal of information on taxable incomes and deductions which enable us to calculate rather precisely the marginal tax rate facing each household. The third aim is to estimate wealth elasticities of demand for a range of assets and liabilities. We test the frequently made assumption of constant relative risk aversion.

Suggested Citation

  • King, Mervyn & Leape, Jonathan, 1985. "Wealth and Portfolio Composition: Theory and Evidence," CEPR Discussion Papers 43, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:43
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    Cited by:

    1. Hausman, Jerry A & Poterba, James M, 1987. "Household Behavior and the Tax Reform Act of 1986," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 101-119, Summer.
    2. Weichert, Ronald & Zietz, Joachim, 1986. "Das Verhalten der privaten Haushalte am Kapitalmarkt: Eine empirirische Analyse," Kiel Working Papers 262, Kiel Institute for the World Economy (IfW Kiel).

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