Heterogeneous Background Risks and Portfolio Choice: Evidence from Micro-Level Data

Journal of Money, Credit and Banking, Forthcoming

50 Pages Posted: 16 Feb 2009 Last revised: 5 Nov 2014

See all articles by Darius Palia

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Yaxuan Qi

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Date Written: May 14, 2013

Abstract

We construct a set of household-level background risk variables to capture the covariance structure of three nonfinancial assets and two financial assets. These risks are in general statistically significant and economically important for a household’s stock market participation and stock holdings. A one standard deviation increase in background risks reduces the participation probability by 11% and the stock holdings to wealth ratio by 4%. The volatilities of labor income, housing value, and business income reduce a household’s participation and stock holdings. A household with labor income highly correlated with stock (bond) returns is less (more) likely to invest in stock.

Keywords: background risks, stock market participation, portfolio choice, asset returns

JEL Classification: G11, C25

Suggested Citation

Palia, Darius and Qi, Yaxuan and Wu, Yangru, Heterogeneous Background Risks and Portfolio Choice: Evidence from Micro-Level Data (May 14, 2013). Journal of Money, Credit and Banking, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1342546 or http://dx.doi.org/10.2139/ssrn.1342546

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

Yaxuan Qi (Contact Author)

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

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