Hedging, Familiarity and Portfolio Choice

Massimo Massa and Andrei Simonov

The Review of Financial Studies, 2006, vol. 19, issue 2, 633-685

Abstract: We exploit the restrictions of intertemporal portfolio choice in the presence of nonfinancial income risk to test hedging using the information contained in the actual portfolio of the investor. We use a unique data set of Swedish investors with information broken down at the investor level and into various components of investor wealth, income, and demographic characteristics. Portfolio holdings are identified at the stock level. We show that investors do not hedge but invest in stocks closely related to their nonfinancial income. We explain this with familiarity, that is, the tendency to concentrate holdings in stocks to which the investor is geographically or professionally close or that he has held for a long period. We show that familiarity is not a behavioral bias, but is information driven. Familiarity-based investment allows investors to earn higher returns than they would have otherwise earned if they had hedged. Copyright 2006, Oxford University Press.

Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (212)

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhj013 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Hedging, Familiarity and Portfolio Choice (2004)
Working Paper: Hedging, Familiarity and Portfolio Choice (2004)
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:oup:rfinst:v:19:y:2006:i:2:p:633-685

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Review of Financial Studies is currently edited by Itay Goldstein

More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().