Background Risk, Nature's Shocks and Investment Decisions

37 Pages Posted: 9 Jul 2022

See all articles by M Tani

M Tani

UNSW Canberra; UNSW Canberra

Chuhong Wang

Yango University

Xingfei Liu

University of Alberta

Yan Zhao

affiliation not provided to SSRN

Abstract

This paper explores the causal link between background risk and household portfolio choices following a unique exogenous shock: land expropriation with a change in the residence status ( hukou ). Such change enables household members to access public goods in the area of residence, which in turn reduce their background risk through lower cost of health, pension, unemployment, and (mandatory) schooling. We develop a theoretical model to trace the effect of the shock prior to apply several estimation techniques to data from the Rural Urban Migration in China (RUMiC) to quantify the effect of the change. We find that being issued with an urban hukou encourages more investments in risky assets. The results contribute to the literature on the influence of background risk on portfolio choices, and its relevance in the context of a rapidly expanding set of opportunities for financial investments.

Keywords: background risk, investment choices, exogenous shock

Suggested Citation

Tani, M and Wang, Chuhong and Liu, Xingfei and Zhao, Yan, Background Risk, Nature's Shocks and Investment Decisions. Available at SSRN: https://ssrn.com/abstract=4158630

M Tani (Contact Author)

UNSW Canberra

4 Gamban Square
Ngunnawal, ACT 2913
Australia

HOME PAGE: http://https://research.unsw.edu.au/people/professor-massimiliano-tani-bertuol

UNSW Canberra

4 Gamban Square
Ngunnawal, ACT 2913
Australia

HOME PAGE: http://https://research.unsw.edu.au/people/professor-massimiliano-tani-bertuol

Chuhong Wang

Yango University ( email )

Fujian
China

Xingfei Liu

University of Alberta ( email )

Edmonton, Alberta T6G 2R3
Canada

Yan Zhao

affiliation not provided to SSRN

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
15
Abstract Views
132
PlumX Metrics