Premium
Income Risk and Portfolio Choice: An Empirical Study
Author(s) -
ANGERER XIAOHONG,
LAM POKSANG
Publication year - 2009
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01456.x
Subject(s) - portfolio , economics , national longitudinal surveys , permanent income hypothesis , comprehensive income , demographic economics , labour economics , financial economics , monetary economics , gross income , public economics , market liquidity , tax reform , state income tax
This paper investigates the relationship between portfolio choice and labor income risk in the National Longitudinal Survey of Youth 1979 Cohort. Permanent income risk (variability of shocks to income that have permanent effect) significantly reduces the share of risky assets in the household's portfolio, while transitory income risk (variability of shocks with no lasting effect) does not. This result provides strong evidence that households' portfolio choices respond to labor income risks in a manner consistent with economic theory.