Consumption-Income Sensitivity and Portfolio Choice

72 Pages Posted: 16 Mar 2014 Last revised: 18 Jun 2018

See all articles by Jawad M. Addoum

Jawad M. Addoum

Cornell SC Johnson College of Business

Stefanos Delikouras

University of Miami - Department of Finance

George M. Korniotis

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

Date Written: April 30, 2018

Abstract

Contrary to the predictions of traditional life-cycle models, household consumption is excessively sensitive to current income. Similarly, weak evidence of income hedging runs against standard portfolio theory. We link these two puzzles by modifying the theoretical framework of Viceira (2001) to study how consumption-income sensitivities generated by income in the utility function impact household portfolio choice. Empirically, we fi nd that consumption-income sensitivities affect asset allocation through the income hedging motive. In particular, we show that the interaction between consumption-income sensitivity and the correlation of income growth to stock market returns is an important explanatory variable for households' stock market holdings.

Keywords: life-cycle consumption, income hedging, portfolio theory, consumption-income sensitivity

JEL Classification: D11, D12, D14, G11

Suggested Citation

Addoum, Jawad M. and Delikouras, Stefanos and Korniotis, George M., Consumption-Income Sensitivity and Portfolio Choice (April 30, 2018). Available at SSRN: https://ssrn.com/abstract=2409209 or http://dx.doi.org/10.2139/ssrn.2409209

Jawad M. Addoum

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

Stefanos Delikouras

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

George M. Korniotis (Contact Author)

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

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