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

46 Pages Posted: 5 Jan 2007 Last revised: 3 Jul 2010

See all articles by Stefan Nagel

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)

Markus K. Brunnermeier

Princeton University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 2006

Abstract

We use data from the PSID to investigate how households' portfolio allocations change in response to wealth fluctuations. Persistent habits, consumption commitments, and subsistence levels can generate time-varying risk aversion with the consequence that when the level of liquid wealth changes, the proportion a household invests in risky assets should also change in the same direction. In contrast, our analysis shows that the share of liquid assets that households invest in risky assets is not affected by wealth changes. Instead, one of the major drivers of households' portfolio allocation seems to be inertia: households rebalance only very slowly following inflows and outflows or capital gains and losses.

Suggested Citation

Nagel, Stefan and Brunnermeier, Markus Konrad, Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation (December 2006). NBER Working Paper No. w12809, Available at SSRN: https://ssrn.com/abstract=955242

Stefan Nagel (Contact Author)

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Markus Konrad Brunnermeier

Princeton University - Department of Economics ( email )

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