Why does junior put all his eggs in one basket? A potential rational explanation for holding concentrated portfolios

Hervé Roche, Stathis Tompaidis and Chunyu Yang

Journal of Financial Economics, 2013, vol. 109, issue 3, 775-796

Abstract: Empirical studies of household portfolios show that young households, with little financial wealth, hold underdiversified portfolios that are concentrated in a small number of assets, a fact often attributed to behavioral biases. We present a potential rational alternative: we show that investors with little financial wealth, who receive labor income, rationally limit the number of assets they invest in when faced with financial constraints such as margin requirements and restrictions on borrowing. We provide theoretical and numerical support for our results and identify the ratio of financial wealth to labor income as a useful control variable for household portfolio studies.

Keywords: Asset selection; Underdiversification; Labor income; Financial constraints; Household portfolios (search for similar items in EconPapers)
JEL-codes: D81 D83 E21 G11 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:109:y:2013:i:3:p:775-796

DOI: 10.1016/j.jfineco.2013.03.016

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