Income Hedging and Portfolio Decisions

70 Pages Posted: 9 Nov 2012 Last revised: 31 Jul 2013

See all articles by Yosef Bonaparte

Yosef Bonaparte

University of Colorado at Denver - Department of Finance

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Alok Kumar

University of Miami - School of Business Administration

Date Written: July 31, 2013

Abstract

We examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives. Economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns decreases. Surprisingly, empirical studies find limited support for the income hedging motive. Using a rich, unique Dutch dataset and the NLSY data from the U.S., we show that when the income-return correlation is low, individuals exhibit a greater propensity to participate in the market and allocate a larger proportion of their wealth to risky assets. Even when the income risk is high, individuals exhibit a higher propensity to participate in the market when the hedging potential is high. These findings suggest that income hedging is an important determinant of stock market participation and asset allocation decisions.

Keywords: income hedging, market participation, asset allocation, household finance

JEL Classification: G10, G11, G12

Suggested Citation

Bonaparte, Yosef and Korniotis, George M. and Kumar, Alok, Income Hedging and Portfolio Decisions (July 31, 2013). Available at SSRN: https://ssrn.com/abstract=2172846 or http://dx.doi.org/10.2139/ssrn.2172846

Yosef Bonaparte

University of Colorado at Denver - Department of Finance ( email )

United States

George M. Korniotis

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)

Miami Business School ( email )

University of Miami - Behavioral Decision Making Cluster ( email )

5250 University Drive
Coral Gables, FL 33124
United States

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

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