Portfolio Allocation, Income Uncertainty and Households' Flight from Risk

42 Pages Posted: 19 Dec 2016

See all articles by Sarah Brown

Sarah Brown

University of Sheffield - Department of Economics; IZA Institute of Labor Economics

Daniel Gray

University of Sheffield

Mark N. Harris

Curtin University

Christopher Spencer

Loughborough University

Abstract

Analysing the US Panel Study of Income Dynamics, we present a new empirical method to investigate the extent to which households reduce their financial risk exposure when confronted with background risk. Our novel modelling approach – termed a deflated fractional ordered probit model – quantifies how the overall asset composition in a portfolio adjusts with background risk, and is unique in recovering for, any given risky asset class, the shares that are reallocated to a safer asset category. Background risk exerts a significant impact on household portfolios, resulting in a 'flight from risk', away from riskier to safe assets.

Keywords: asset allocation, background risk, flight from risk, fractional models

JEL Classification: C33, C35, D14, G11

Suggested Citation

Brown, Sarah and Gray, Daniel and Harris, Mark N. and Spencer, Christopher, Portfolio Allocation, Income Uncertainty and Households' Flight from Risk. IZA Discussion Paper No. 10408. Available at SSRN: https://ssrn.com/abstract=2886779

Sarah Brown (Contact Author)

University of Sheffield - Department of Economics

9 Mappin Street
Sheffield, S1 4DT
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Daniel Gray

University of Sheffield

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

Mark N. Harris

Curtin University ( email )

Kent Street
Bentley
Perth, WA WA 6102
Australia

HOME PAGE: http://business.curtin.edu.au/contact/staff_directory/?profile=Mark-Harris

Christopher Spencer

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain

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