Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden
Journal of Finance, Forthcoming
54 Pages Posted: 22 Jun 2020 Last revised: 7 Sep 2023
Date Written: August 26, 2023
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: Suggested Citation