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Ambiguity Aversion and Household Portfolio Choice Puzzles: Empirical Evidence

66 Pages Posted: 16 Oct 2012 Last revised: 5 Jan 2016

Stephen G. Dimmock

Nanyang Technological University - Division of Finance

Roy Kouwenberg

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Mahidol University - College of Management

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Kim Peijnenburg

Netspar; HEC Paris; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: May 29, 2015

Abstract

We test the relation between ambiguity aversion and five household portfolio choice puzzles: non-participation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative U.S. household survey, we measure ambiguity preferences using custom-designed questions based on Ellsberg urns. As theory predicts, ambiguity aversion is negatively associated with stock market participation, the fraction of financial assets in stocks, and foreign stock ownership, but it is positively related to own-company stock ownership. Conditional on stock ownership, ambiguity aversion is related to portfolio under-diversification, and during the financial crisis, ambiguity-averse respondents were more likely to sell stocks.

Keywords: ambiguity aversion, stock market participation, household portfolio puzzles, homebias, own-company stock puzzle, portfolio under-diversification, household finance

JEL Classification: G11, D81, D14, C83

Suggested Citation

Dimmock, Stephen G. and Kouwenberg, Roy and Mitchell, Olivia S. and Peijnenburg, Kim, Ambiguity Aversion and Household Portfolio Choice Puzzles: Empirical Evidence (May 29, 2015). Netspar Discussion Paper No. 09/2012-035 - revised version May 2015. Available at SSRN: https://ssrn.com/abstract=2162410 or http://dx.doi.org/10.2139/ssrn.2162410

Stephen G. Dimmock

Nanyang Technological University - Division of Finance ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

Roy R. P. Kouwenberg

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

HOME PAGE: http://people.few.eur.nl/kouwenberg

Mahidol University - College of Management ( email )

69 Vipawadee Rangsit Road
Bangkok, 10400
Thailand

HOME PAGE: http://www.cmmu.mahidol.ac.th/main/faculty/aroy.asp

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kim Peijnenburg

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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