Influence Of Heterogeneity In Household Portfolio Choice

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Most of the empirical studies in this field are based on micro-data collected from developed countries. Since investors’ risk attitude plays an important role in forming their portfolio choice, there have been numerous studies that investigated household portfolio choice by trying to identify the determinants of risk attitude.
This supports the findings of Lott and Kenny (1999) and Barber and Odean (2001), who observe a difference in the risk attitude between men and women.
A rich literature shows that demographic characteristics contribute to the heterogeneity in household portfolio choice by influencing risk attitude. Dohmen et al. (2011) conduct an empirical study based on the 2004 wave of the Socioeconomic-Panel of Germany to detect the
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The potential rationale of these phenomena is that young people face a longer investment horizon than old people (Campbell and Viceira, 2003). They also observe that being female is associated with less risk taking, which is in line with Barber and Odean (2001) who suggest a difference between the risk attitude of male and female. The level of education and financial literacy also contribute to the heterogeneity in household financial decisions. More educated investors are generally more capable of gathering and understanding stock market information, and have therefore a higher probability to own risky assets (Vissing-Jørgensen, 2002; Christiansen et al., 2008). Though observable characteristics can explain a large fraction of the cross-sectional heterogeneity in household financial behavior, the effect of non-observable characteristics should not be ignored. Calvet and Sodini (2014) analyze the portfolios choice of U.S. households with an adult twin during the 1999 to 2002 period. This helps to control for unobservable factors such as genes and abilities. They argue that there is no significant effect of education on risk preference and that it is the implicit genetic and economic circumstances (like financial wealth, income risk, etc.) that matter in determining portfolio choice. Marital status is …show more content…
It refers to the risks arising from labor uncertainty, private business, real estate, health status, committed expenditures, and so on. Given the existence of background risk, investors are more likely to increase their precautionary saving and avoid taking other forms of risk. In other words, the presence of background risk will reduce households’ risky asset holdings (Pratt and Zeckhauser, 1987). Palia et al. (2013) and Guiso et al. (1996) find that labour income uncertainty and borrowing constraints tend to restrain investors’ participation in equity markets. This is consistent with Cocco et al. (2005), who observe a considerable decrease in stock holding associated with dramatic labour income drops. Calvet and Sodini (2014) use twin regressions to control for unobservable characteristics. They confirm the cross sectional findings that self-employed and credit constrained twins with more volatile income invest less in equity markets. Heaton and Lucas (2000a, 2000b) observe huge heterogeneity in the background risk across households. Their analysis shows that high entrepreneurial income risk is associated with a lower risky share in the portfolio. Non-entrepreneurs who hold stocks of their employer’s companies also tend to allocate less of their financial assets to risky assets. Cardak and Wilkins (2009) test the determinants of

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