Financial Risk Aversion and Household Asset Diversification

30 Pages Posted: 19 Jul 2008 Last revised: 26 Jun 2009

See all articles by Nataliya Barasinska

Nataliya Barasinska

German Institute for Economic Research (DIW Berlin)

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin); JIBS

Andreas Stephan

affiliation not provided to SSRN

Date Written: July 1, 2008

Abstract

This paper explores the relationship between risk attitude and asset diversification in household portfolios. We first examine the impact of manifested risk aversion on the total number of distinct assets held in a portfolio (naive diversification). The second part of the paper focuses on a more sophisticated strategy of diversification and asks whether financial theory is compatible with observed diversification patterns. Based on the German Socioeconomic Panel which provides unique measures of individual propensity for taking risk, the results of the regression analysis show that, along with some socioeconomic characteristics, the propensity for taking investment risk is an important predictor of a household's diversification strategy. However, some of our findings are strongly at odds with what the concept of mean-variance utility suggests.

Keywords: household finances, diversification, financial portfolio

JEL Classification: D14, G11

Suggested Citation

Barasinska, Nataliya and Schaefer, Dorothea and Stephan, Andreas, Financial Risk Aversion and Household Asset Diversification (July 1, 2008). SOEPpaper No. 117; DIW Berlin Discussion Paper No. 807. Available at SSRN: https://ssrn.com/abstract=1162732 or http://dx.doi.org/10.2139/ssrn.1162732

Nataliya Barasinska (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49 30 8978 9162 (Phone)
+49 30 8978 9104 (Fax)

JIBS ( email )

Jönköping, 55111
Sweden

Andreas Stephan

affiliation not provided to SSRN ( email )

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