Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation

34 Pages Posted: 28 Feb 2005

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

Recent asset pricing models depart from the standard time-separable CRRA preferences - by introducing additive habit formation, for example - so that wealth shocks produce transitory variation in agents' relative risk aversion. We investigate whether there is micro-level evidence in support of this proposed (negative) relationship between wealth shocks and relative risk aversion. To this end, we analyze two decades of panel data on household asset allocation from the PSID and CEX surveys. Using a variety of specifications, we find that the share of financial assets that households invest in risky assets is unaffected by shocks to their wealth. We also find that following in- and outflows of financial wealth, and, in particular, capital gains and losses, households rebalance only very little. But even controlling for this inertia, wealth shocks do not have economically significant effects on household asset allocation. Our results suggest that wealth fluctuations do not generate time-varying risk aversion.

Keywords: Household portfolio choice, risk aversion, panel data

JEL Classification: G11, G12, D91

Suggested Citation

Brunnermeier, Markus Konrad and Nagel, Stefan, Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation (June 2005). Available at SSRN: https://ssrn.com/abstract=676116 or http://dx.doi.org/10.2139/ssrn.676116

Markus Konrad Brunnermeier

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
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Stefan Nagel (Contact Author)

University of Chicago - Booth School of Business ( email )

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United States

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research ( email )

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United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Germany

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