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Precautionary Saving, Financial Risk, and Portfolio Choice
Author(s) -
Deidda Manuela
Publication year - 2013
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/roiw.12001
Subject(s) - precautionary savings , portfolio , economics , control (management) , finance , business , market liquidity , management
Relying on a direct question about the desired amount of precautionary wealth from the 2002 wave of the Italian “Survey of Household Income and Wealth,” I assess the main determinants of the precautionary motive for saving, focusing on the role played by financial risk on households' saving decisions. Households that invest mainly in safe assets do not need to protect themselves against future and unexpected financial losses. Consequently, once we control for households' sources of risk beside financial ones, the amount of precautionary savings of a household investing exclusively in safe assets should be lower compared to households who detain a non‐negligible share of risky assets in their portfolio. Results show that, as expected, a strong and negative correlation exists between the desired amount of precautionary wealth and the ownership of a portfolio made exclusively of safe assets.