The Role of Labor-Income Risk in Household Risk-Taking?

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See all articles by Sylwia Hubar

Sylwia Hubar

Natixis

Christos Koulovatianos

Department of Finance, University of Luxembourg

Jian Li

Independent

Date Written: July 26, 2020

Abstract

In fifteen European countries, China, and the US, stocks and business equity as a share of total household assets are represented by an increasing and convex function of income/wealth. A parsimonious model fitted to the data shows why background labor- income risk can explain much of this risk-taking pattern. Uncontrollable labor-income risk stresses middle-income households more because labor income is a larger fraction of their total lifetime resources compared with the rich. In response, middle-income households re-duce (controllable) financial risk. Richer households, having less pressure, can afford more risk-taking. The poor take low risk because they avoid jeopardizing their subsistence consumption.

Keywords: background risk, household-portfolio shares, business equity, subsistence consumption, wealth inequality

JEL Classification: G11, D91, D81, D14, D11, E21

Suggested Citation

Hubar, Sylwia and Koulovatianos, Christos and Li, Jian, The Role of Labor-Income Risk in Household Risk-Taking? (July 26, 2020). CFS Working Paper, No. 640, 2020, Available at SSRN: https://ssrn.com/abstract=

Sylwia Hubar

Natixis ( email )

France

Christos Koulovatianos (Contact Author)

Department of Finance, University of Luxembourg ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

Jian Li

Independent ( email )

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