Household portfolio choices under (non-)linear income risk: an empirical framework

Julio Gálvez
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Julio Gálvez: Banco de España

No 2327, Working Papers from Banco de España

Abstract: This paper develops a flexible, semi-structural framework to empirically quantify the non-linear transmission of income shocks to household portfolio choice decisions both at the extensive and intensive margins. I model stock market participation and portfolio allocation rules as age-dependent functions of persistent and transitory earnings components, wealth and unobserved taste shifters. I establish non-parametric identification and propose a tractable, simulation-based estimation algorithm, building on recent developments in the sample selection literature. Using recent waves of PSID data, I find heterogeneous income and wealth effects on both extensive and intensive margins, over the wealth and life-cycle dimensions. These results suggest that preferences are heterogeneous across the wealth distribution and over the life cycle. Moreover, in impulse response exercises, I find sizeable extensive margin responses to persistent income shocks. Finally, I find heterogeneity in participation costs across households in the wealth distribution.

Keywords: stock market participation; non-linear income persistence; sample selection; quantile selection models; latent variables (search for similar items in EconPapers)
JEL-codes: C23 C24 D31 G50 J24 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2023-09
New Economics Papers: this item is included in nep-ecm, nep-lma and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2327

DOI: 10.53479/33792

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