Ambiguity Aversion and Household Portfolio Choice Puzzles: Empirical Evidence
66 Pages Posted: 16 Oct 2012 Last revised: 5 Jan 2016
Date Written: May 29, 2015
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: Suggested Citation