Portfolio Choice with a Correlated Background Risk: Theory and Evidence

Luc Arrondel and Hector Calvo-Pardo
Authors registered in the RePEc Author Service: Hector Fernando Calvo Pardo

DELTA Working Papers from DELTA (Ecole normale supérieure)

Abstract: We extend the static portfolio choice problem with a small background risk to the case of small partially correlated background risks. We show that respecting the theories under which risk substitution appears, except for the independence of background risk, it is perfectly rational for the individual to increase his optimal exposure to portfolio risk when risks are partially negatively correlated. Then, we test empirically the hypothesis ofrisk substitutability using INSEE data on French households. We find that households respond by increasing their stockholdings in response to the increase in future earnings uncertainty. This conclusion is in contradictionwith results obtained in other countries. So, in light of these results, our model provides an explanation to account for the lack of empirical consensus on cross-country tests of risk substitution theory that encompasses and criticises all of them.

Date: 2002
New Economics Papers: this item is included in nep-fin, nep-mic and nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.delta.ens.fr/abstracts/wp200216.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.delta.ens.fr:80 (No such host is known. )

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:del:abcdef:2002-16

Access Statistics for this paper

More papers in DELTA Working Papers from DELTA (Ecole normale supérieure) Contact information at EDIRC.
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).