Resuscitating Businessman Risk: A Rationale for Familiarity-Based Portfolios

Doriana Ruffino

No 252, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: This paper studies two frequently observed portfolio behaviors that are seemingly inconsistent with rational portfolio choice. The first is the tendency of workers and entrepreneurs to hold their company's stock. The second is the propensity of workers to limit their equity holdings through time. The explanation offered here for both of these behaviors lies in the option to switch jobs when one?s company does poorly. This is equivalent to holding put options on one's own company stock and call options on the other company's stock, where both options must be exercised at the same time. Given these initial undiversified implicit financial holdings, workers need to allocate a relatively large share of their regular financial assets to their own company's stock and a relatively small share to the stock of their alternative employment simply to restore overall portfolio balance. I find that, under certain conditions, workers optimally hold almost 40% of their financial wealth in their company's stock.

Keywords: Life-Cycle Modeling; Industry(firm)-specific Risk; Job-switching Options; Portfolio Choice; Familiarity-based; Investments; Businessman Risk (search for similar items in EconPapers)
JEL-codes: D91 G11 G12 J24 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2012
New Economics Papers: this item is included in nep-bec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Resuscitating Businessman Risk: A Rationale for Familiarity-Based Portfolios (2014)
Working Paper: Resuscitating The Businessman Risk: A Rationale For Familiarity-Based Portfolios (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:252

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