Equity Fund Ownership and the Cross-Regional Diversification of Household Risk

35 Pages Posted: 30 Jan 2008

See all articles by Sascha O. Becker

Sascha O. Becker

Monash University - Department of Economics; University of Warwick

Mathias Hoffmann

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 1, 2008

Abstract

We explore the link between portfolio home bias and consumption risk sharing among Italian regions using aggregated household level information on consumption, income and portfolio holdings. We propose to use data on equity fund ownership to proxy for regional home bias: equity funds are typically diversified at the national or international level and will therefore provide interregional diversification. In assessing the impact of equity fund ownership on interregional risk sharing we distinguish between two dimensions: variation in the share of equity funds in fund-holder's wealth (the intensive margin) and variation in the fraction of households that hold funds (the extensive margin). We find that equity fund ownership is an important determinant of interregional risk sharing. First, diversification incentives qualitatively line up with actually observed portfolio choices: fund holders in regions where households are particularly exposed to region-specific labor income risk hold a larger fraction of their wealth in (out-of-region) funds. Secondly, for a region as a whole, risk sharing increases in both the intensive and the extensive margins of diversification and the two margins reinforce each other. The marginal effect of wider equity fund participation seems particularly strong, suggesting that policies aimed at increasing equity market participation could help foster better interregional risk sharing.

Keywords: consumption risk sharing, regional home bias, survey of household income and wealth, labor income risk, portfolio choice, stock market participation

JEL Classification: F36, F37, G1

Suggested Citation

Becker, Sascha O. and Hoffmann, Mathias, Equity Fund Ownership and the Cross-Regional Diversification of Household Risk (January 1, 2008). CESifo Working Paper Series No. 2205, Available at SSRN: https://ssrn.com/abstract=1088650

Sascha O. Becker

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Mathias Hoffmann (Contact Author)

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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