Modelling optimal asset allocation when households experience health shocks

Jiapeng Liu (), Rui Lu (), Ronghua Yi () and Ting Zhang ()
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Jiapeng Liu: China Jiliang University
Rui Lu: Sun Yat-Sen University
Ronghua Yi: China Jiliang University
Ting Zhang: University of Dayton

Review of Quantitative Finance and Accounting, 2017, vol. 49, issue 1, No 9, 245-261

Abstract: Abstract Health status is an important factor in household portfolio decision-making. We develop a theoretical framework to model how households make optimal asset allocation decisions in response to health risks. Our two- and three-asset models both suggest that the maximum utility is derived when households allocate a majority of their assets to human capital. When households experience acute illness shocks, their welfare and portfolio values reduce, and they need to increase their investment in human capital. When an expensive health catastrophe befalls member(s) of households, the optimal decision for asset-rich households is to undertake medical treatment, whereas for asset-poor households it is to forgo treatment. Asset-poor households in particular require public financial assistance to enable them to invest in human capital.

Keywords: Households; Health shocks; Asset allocation; Human capital; Public assistance (search for similar items in EconPapers)
JEL-codes: E2 G1 I1 I3 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-016-0589-6

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