Life Events and Portfolio Rebalancing of the Family Home
7 Pages Posted: 9 Feb 2017
Date Written: February 8, 2017
Life events may alter the circumstances and life trajectory, depending on their magnitude, duration and whether or not it was foreseen. The responses to these life events are likely to be influenced by personal appraisal of the event, coping skills, access to effective support networks, socio-economic resources and recent and current exposure to other difficult or favourable events or circumstances (Moloney et al., 2012). Much of the household financial decision-making literature concentrates on static models using cross-sectional data, which means that there is little insight into how households react to changing circumstances or respond financially if they experience a significant life event. However, there is a growing body of research that is utilising longitudinal panel data, including repeated cross-sections and dynamic models, to gain insight into household’s portfolio rebalancing responses when they have experienced a financial shock of some sort.
The purpose of this study is to examine the impact of life events on the portfolio rebalancing of the family home. The high ownership of property in Australian household asset portfolios exposes participants’ levels of wealth to property market fluctuations and interest rate changes, and in some cases owning a home increases the financial stress experienced by the household. Thus, when the household experiences a negative financial shock derived from a life event, the household may be forced to divest or downsize their family home, resulting in a loss of wealth and other intangible benefits like life satisfaction.
To quantify households’ portfolio rebalancing response to a life event, a dynamic model is employed that incorporates two lags and two leads of each shock on the ownership of the family home. The investigation of the asset holding before and after the shock determines the magnitude and duration of the impact of the life event on their financial decisions. This research is important as life events (or shocks) such as these may impact dramatically on a household’s financial position. Wealth may increase or divide, spending needs change, new expenditures are formed regarding future income, longevity, and bequests. These transitions constitute an important source of risk, with the potential to affect wealth accumulation, including the demand for (risky) assets.
JEL Classification: D10, D13, D14
Suggested Citation: Suggested Citation