Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden

42 Pages Posted: 22 Jun 2020 Last revised: 7 Oct 2020

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 4, 2020

Abstract

Using Swedish administrative panel data, we show 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. We call this measure of income risk "cyclical skewness'' and show that it is a better predictor of equity holdings than other income risk measures such as variance, covariance, and counter-cyclical volatility. In line with theory, our findings are stronger at the beginning of the life-cycle, are not significant for individuals with substantial financial wealth, and are stronger when we focus on permanent income shocks. Finally, within their risky portfolio, workers put less weight on securities generating negative returns when their own income risk increases.

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 4, 2020). 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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