Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden
48 Pages Posted: 22 Jun 2020 Last revised: 31 May 2022
Date Written: May 26, 2022
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
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