Income Risk, Borrowing Constraints, and Portfolio Choice

Luigi Guiso, Tullio Jappelli () and Daniele Terlizzese

American Economic Review, 1996, vol. 86, issue 1, 158-72

Abstract: Economic theory suggests that uninsurable income risk and the expectation of future borrowing constraints can reduce the share of risky assets in a household's portfolio. If the utility function exhibits decreasing absolute risk aversion and decreasing prudence, an individual will reduce his exposure to rate-of-return risks when confronted with other independent risks. If there are transaction costs, the expectation of future borrowing constraints should induce individuals to keep a lower proportion of their wealth in the form of illiquid and risky assets. The authors find support for these propositions in a cross-section of Italian households. Copyright 1996 by American Economic Association.

Date: 1996
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Working Paper: Income Risk, Borrowing Constraints and Portfolio Choice (1994)
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