Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden

48 Pages Posted: 22 Jun 2020 Last revised: 31 May 2022

See all articles by Sylvain Catherine

Sylvain Catherine

University of Pennsylvania - Finance Department

Paolo Sodini

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Yapei Zhang

ShanghaiTech University - School of Entrepreneurship and Management

Date Written: May 26, 2022

Abstract

Using Swedish administrative panel data, we document that workers facing higher left-tail income risk when equity markets perform poorly are less likely to participate in the stock market and, conditional on participation, have lower equity shares. In line with theory, the relationship between cyclical skewness and stock holdings is proportional to the share of human capital in a worker’s total wealth and vanishes as workers get closer to retirement. Cyclical skewness also predicts portfolio differences within pairs of identical twins. Our findings show that households hedge against correlated tail risks, an important mechanism in asset pricing and portfolio choice models.

Keywords: Household Finance, Labor Income Risk, Portfolio Choices

Suggested Citation

Catherine, Sylvain and Sodini, Paolo and Zhang, Yapei, Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden (May 26, 2022). Swedish House of Finance Research Paper No. 20-20, Available at SSRN: https://ssrn.com/abstract=3612590 or http://dx.doi.org/10.2139/ssrn.3612590

Sylvain Catherine

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Paolo Sodini

Stockholm School of Economics - Department of Finance ( email )

Sveavagen 65, Box 6501
SE-113 83 Stockholm
Sweden
46 8 7369165 (Phone)
46 8 312327 (Fax)

HOME PAGE: http://www.hhs.se/secfi/People/Faculty/Finpso/finp

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Yapei Zhang (Contact Author)

ShanghaiTech University - School of Entrepreneurship and Management ( email )

100 Haike Rd
Pudong Xinqu, Shanghai
China

HOME PAGE: http://https://yapeizhang.com

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