Wealth fluctuations and investment in risky assets: The UK micro evidence on households asset allocation

Ivan Paya () and Peng Wang

Journal of Empirical Finance, 2016, vol. 38, issue PA, 221-235

Abstract: This paper is the first to examine whether UK households exhibit constant or time-varying relative risk aversion within a microdata panel framework. We analyse whether portfolio allocations in risky assets change in response to fluctuations in wealth. Our set of controls for background wealth is comprehensive, and include, as a novelty in this type of studies, pension wealth. The inference about the risk profile of British households depends upon the relevant measure of background wealth. We do not find support for decreasing relative risk aversion (DRRA). Constant relative risk aversion (CRRA) prevails for the case of liquid wealth, but for the broadest definitions —those including home equity and pensions— the evidence favours increasing relative risk aversion (IRRA).

Keywords: Relative risk aversion; Portfolio choice; Panel data; Pension wealth (search for similar items in EconPapers)
JEL-codes: D12 E21 G11 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:38:y:2016:i:pa:p:221-235

DOI: 10.1016/j.jempfin.2016.07.003

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