Income hedging and portfolio decisions

Yosef Bonaparte, George M. Korniotis and Alok Kumar

Journal of Financial Economics, 2014, vol. 113, issue 2, 300-324

Abstract: We examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives. Economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns decreases. Surprisingly, empirical studies find limited support for the income hedging motive. Using a rich, unique Dutch data set and the National Longitudinal Survey of the Youth (NLSY) from the United States, we show that when the income-return correlation is low, individuals exhibit a greater propensity to participate in the market and allocate a larger proportion of their wealth to risky assets. Even when the income risk is high, individuals exhibit a higher propensity to participate in the market when the hedging potential is high. These findings suggest that income hedging is an important determinant of stock market participation and asset allocation decisions.

Keywords: Market participation; Asset allocation; Income risk-return correlation; Temporary and permanent income shocks; Household finance (search for similar items in EconPapers)
JEL-codes: D14 G10 G11 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X14000944
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:113:y:2014:i:2:p:300-324

DOI: 10.1016/j.jfineco.2014.05.001

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().