Portfolio Allocation, Income Uncertainty and Households' Flight from Risk

Sarah Brown (), Daniel Gray (), Mark Harris and Christopher Spencer
Additional contact information
Daniel Gray: University of Sheffield

No 10408, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Analysing the US Panel Study of Income Dynamics, we present a new empirical method to investigate the extent to which households reduce their financial risk exposure when confronted with background risk. Our novel modelling approach – termed a deflated fractional ordered probit model – quantifies how the overall asset composition in a portfolio adjusts with background risk, and is unique in recovering for, any given risky asset class, the shares that are reallocated to a safer asset category. Background risk exerts a significant impact on household portfolios, resulting in a 'flight from risk', away from riskier to safe assets.

Keywords: fractional models; flight from risk; background risk; asset allocation (search for similar items in EconPapers)
JEL-codes: C33 C35 D14 G11 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2016-12
New Economics Papers: this item is included in nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
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Published - published as 'Household portfolio allocation, uncertainty, and risk' in: Journal of Empirical Finance, 2021, 63, 96 - 117

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Working Paper: Portfolio Allocation, Income Uncertainty and Households' Flight from Risk (2016)
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