Habit Formation and Persistence in Individual Asset Portfolio Holdings: The Case of Italy

Sònia Muñoz

No 2006/029, IMF Working Papers from International Monetary Fund

Abstract: This paper uses six waves of the Bank of Italy Survey of Households Income and Wealth to explore the dynamics of asset portfolio ownership. The household asset portfolio decision is a choice among discrete alternatives, and I model the problem in a multinomial framework. I focus on a particularly important feature of household portfolio behavior: the infrequency of portfolio allocation changes. I find evidence of strong unobserved heterogeneity through time-varying error components, which I interpret as taste persistence in both the risky and safe asset participation decisions. I estimate the model using the method of maximum smoothly simulated likelihood.

Keywords: WP; dependent variable; Portfolio Allocations; Incomplete Markets; Stockholding Puzzle; Habits; Multiperiod Multinomial Probit; risky assets; safe assets; financial asset allocation decision; covariance matrix; simulation estimation method; portfolio decision; Stocks; Bonds; Asset allocation; Stock markets; Logit models (search for similar items in EconPapers)
Pages: 44
Date: 2006-01-01
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