Portfolio Choice in the Presence of Background Risk
Deborah J. Lucas
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)
University of Chicago - Finance
Economic Journal, Vol. 110, P. 460, January 2000
In this paper, we focus on how the presence of background risks - from sources such as labour and entrepreneurial income - influences portfolio allocations. This interaction is explored in a theoretical model that is calibrated using cross-sectional data from a variety of sources. The model is shown to be consistent with some but not all aspects of cross-sectional observations of portfolio holdings. The paper also provides a survey of the extensive theoretical and empirical literature on portfolio choice.
JEL Classification: G19, F31Accepted Paper Series
Date posted: January 22, 2001
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