Estimating background risk hedging demands from cross-sectional data

41 Pages Posted: 1 Aug 2019 Last revised: 7 Mar 2024

See all articles by James Brugler

James Brugler

University of Melbourne - Department of Finance

Joachim Inkmann

University of Melbourne - Department of Finance

Adrian Rizzo

Australian Bureau of Statistics

Date Written: March 6, 2024

Abstract

Based on a theory of portfolio choice with non-tradable assets, we estimate hedging demands due to background risks before and after the Great Recession for U.S households. Hedging demands related to human capital, residential property and business assets reduce financial risk-taking, but these effects decline over the Great Recession, as does expected risk-adjusted stock market performance. We also estimate the appropriate discount rate to compute the risk-adjusted value of human capital, which declines by around 8% over the period. Unlike previous literature requiring panel data with large time dimensions, our approach only requires cross-sectional data to identify hedging demands.

Keywords: Household Finance, Background Risk, Great Recession

JEL Classification: D14, D15, G01, G11

Suggested Citation

Brugler, James and Inkmann, Joachim and Rizzo, Adrian, Estimating background risk hedging demands from cross-sectional data (March 6, 2024). Available at SSRN: https://ssrn.com/abstract=3428088 or http://dx.doi.org/10.2139/ssrn.3428088

James Brugler (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Business and Economics
Parkville, Victoria 3010 3010
Australia

Joachim Inkmann

University of Melbourne - Department of Finance ( email )

Level 12, 198 Berkeley Street
University of Melbourne, Victoria 3010
Australia
0061 3 9035 8177 (Phone)

HOME PAGE: http://orcid.org/0000-0002-5526-7648

Adrian Rizzo

Australian Bureau of Statistics ( email )

Australia

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