Portfolio Choice in the Presence of Background Risk

Posted: 22 Jan 2001  

Deborah J. Lucas

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

John Heaton

University of Chicago - Finance

Abstract

In this paper, we focus on how the presence of background risks - from sources such as labour and entrepreneurial income - influences portfolio allocations. This interaction is explored in a theoretical model that is calibrated using cross-sectional data from a variety of sources. The model is shown to be consistent with some but not all aspects of cross-sectional observations of portfolio holdings. The paper also provides a survey of the extensive theoretical and empirical literature on portfolio choice.

JEL Classification: G19, F31

Suggested Citation

Lucas, Deborah J. and Heaton, John, Portfolio Choice in the Presence of Background Risk. Economic Journal, Vol. 110, P. 460, January 2000. Available at SSRN: https://ssrn.com/abstract=233418

Deborah J. Lucas (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8333 (Phone)
847-491-5719 (Fax)

John C Heaton

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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