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Precautionary Wealth and Portfolio Allocation: Evidence from Canadian Microdata

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  • Sule Alan

Abstract

This paper estimates the effect of labour income uncertainty on financial wealth and portfolio allocation using two data sources. Wealth and portfolio choice information is obtained from the master files of the new Canadian Survey of Financial Security 1999 (SFS). Labour income risk proxies are constructed for each specified industry group (consistent with the SFS classification) using the Canadian Survey of Labour and Income Dynamics (SLID) between 1996 and 2001. The empirical results suggest the presence of a strong precautionary saving motive among Canadian households. Furthermore, the level of precautionary funds seems to decline when households have relatively unrestricted access to credit markets. The demand for risky and liquid assets does not appear to be affected by labour income uncertainty even after accounting for accessibility to credit markets. However the data suggest a significant hedging motive among the self employed.

Suggested Citation

  • Sule Alan, 2004. "Precautionary Wealth and Portfolio Allocation: Evidence from Canadian Microdata," Social and Economic Dimensions of an Aging Population Research Papers 117, McMaster University.
    • Handle: RePEc:mcm:sedapp:117
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    File URL: http://socserv.mcmaster.ca/sedap/p/sedap117.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kennickell, Arthur & Lusardi, Annamaria, 2005. "Disentangling the importance of the precautionary saving motive," CFS Working Paper Series 2006/15, Center for Financial Studies (CFS).
    2. Arthur Kennickell & Annamaria Lusardi, 2004. "Disentangling the Importance of the Precautionary Saving Mode," NBER Working Papers 10888, National Bureau of Economic Research, Inc.
    3. Steven J. Davis & Felix Kubler & Paul Willen, 2006. "Borrowing Costs and the Demand for Equity over the Life Cycle," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 348-362, May.

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    More about this item

    Keywords

    wealth; portfolio allocation; saving; SLID; SFS;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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