Household life‐cycle asset allocation and background risk of labor income

Mingchao Cai, Jun Zhao, Rulu Pan and Haozhi Huang

China Finance Review International, 2013, vol. 3, issue 2, 117-130

Abstract: Purpose - The purpose of this paper is to empirically analyze the relationship between risky asset allocation and background risk of Chinese residents. Design/methodology/approach - Using Chinese macroeconomic data, this study uses numerical method to solve dynamic stochastic optimal problem. Findings - When risk of labor income is considered, ratio of risky asset declines with rising of age for those people with same age and wealth state; any of the following situations will lead to lower risky assets holdings: lower labor income growth expectations, higher labor income risk or higher labor and financial market covariance risk. Research limitations/implications - This study uses real economy investment return as a proxy of risky asset return. Practical implications - Residents with higher background risks should hold less risky assets, and overcome home‐bias problem during asset allocation. Originality/value - This study takes two kinds of background risk into consideration: labor income risk, and covariance between labor income and risk asset.

Keywords: China; Personal finance; Employment; Income; Investments; Returns; Assets; Background risk; Optimal portfolio; Dynamic utility function (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:v:3:y:2013:i:2:p:117-130

DOI: 10.1108/20441391311330573

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