Income Volatility and Portfolio Choices
Yongsung Chang (),
Marios Karabarbounis and
No 20-01, Working Paper from Federal Reserve Bank of Richmond
Based on administrative data from Statistics Norway, we find economically significant shifts in households' financial portfolios around structural breaks in income volatility. When the standard deviation of labor-income growth doubles, the share of risky assets decreases by 4 percentage points. We ask whether this estimated marginal effect is consistent with a standard model of portfolio choice with idiosyncratic volatility shocks. The standard model generates a much more aggressive portfolio response than we see in the data. We show that Bayesian learning about the underlying volatility regime can reconcile the gap between the model and the data.
Keywords: Income Volatility; Portfolio Choice; Risky Share; Bayesian Learning (search for similar items in EconPapers)
JEL-codes: E2 G1 J3 (search for similar items in EconPapers)
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Working Paper: Income Volatility and Portfolio Choices (2020)
Working Paper: Income Volatility and Portfolio Choices (2018)
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