Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden

Journal of Finance, Forthcoming

Swedish House of Finance Research Paper No. 20-20

54 Pages Posted: 22 Jun 2020 Last revised: 7 Sep 2023

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: August 26, 2023

Abstract

Using Swedish administrative panel data, we document that workers facing higher left-tail income risk when equity markets perform poorly have lower portfolio equity share. In line with theory, the relationship between cyclical skewness and stock holdings increases with 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, Asset pricing, Disaster risk, Labor income risk, Portfolio choices

JEL Classification: G11, G50, D14

Suggested Citation

Catherine, Sylvain and Sodini, Paolo and Zhang, Yapei, Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden (August 26, 2023). Journal of Finance, Forthcoming, 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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