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Heterogeneous Background Risks and Portfolio Choice: Evidence from Micro‐level Data
Author(s) -
PALIA DARIUS,
QI YAXUAN,
WU YANGRU
Publication year - 2014
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12163
Subject(s) - portfolio , economics , stock (firearms) , econometrics , actuarial science , stock market , covariance , financial economics , business , statistics , mathematics , mechanical engineering , paleontology , horse , engineering , biology
We construct a set of household‐level background risk variables to capture the covariance structure of three nonfinancial assets and two financial assets. These risks are in general statistically significant and economically important for a household's stock market participation and stockholdings. A one‐standard‐deviation increase in background risks reduces the participation probability by 11% and the stockholdings‐to‐wealth ratio by 4%. The volatilities of labor income, housing value, and business income reduce a household's participation and stockholdings. A household with labor income highly correlated with stock (bond) returns is less (more) likely to invest in stock.