Advanced Search
MyIDEAS: Login to save this article or follow this journal

Why does junior put all his eggs in one basket? A potential rational explanation for holding concentrated portfolios

Contents:

Author Info

  • Roche, Hervé
  • Tompaidis, Stathis
  • Yang, Chunyu

Abstract

Empirical studies of household portfolios show that young households, with little financial wealth, hold underdiversified portfolios that are concentrated in a small number of assets, a fact often attributed to behavioral biases. We present a potential rational alternative: we show that investors with little financial wealth, who receive labor income, rationally limit the number of assets they invest in when faced with financial constraints such as margin requirements and restrictions on borrowing. We provide theoretical and numerical support for our results and identify the ratio of financial wealth to labor income as a useful control variable for household portfolio studies.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0304405X13000962
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 109 (2013)
Issue (Month): 3 ()
Pages: 775-796

as in new window
Handle: RePEc:eee:jfinec:v:109:y:2013:i:3:p:775-796

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Asset selection; Underdiversification; Labor income; Financial constraints; Household portfolios;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  2. Christopher Carroll, 2005. "The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems," Economics Working Paper Archive 520, The Johns Hopkins University,Department of Economics.
  3. Cuoco, Domenico, 1997. "Optimal Consumption and Equilibrium Prices with Portfolio Constraints and Stochastic Income," Journal of Economic Theory, Elsevier, vol. 72(1), pages 33-73, January.
  4. Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan Storud, 2004. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," NBER Working Papers 10934, National Bureau of Economic Research, Inc.
  5. Hyeng Keun Koo, 1998. "Consumption and Portfolio Selection with Labor Income: A Continuous Time Approach," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 8(1), pages 49-65.
  6. Paul Willen & Felix Kubler, 2006. "Collateralized borrowing and life-cycle portfolio choice," Public Policy Discussion Paper, Federal Reserve Bank of Boston 06-4, Federal Reserve Bank of Boston.
  7. Luis M. Viceira, 2001. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," Journal of Finance, American Finance Association, vol. 56(2), pages 433-470, 04.
  8. William N. Goetzmann & Alok Kumar, 2004. "Equity Portfolio Diversification," Yale School of Management Working Papers, Yale School of Management ysm17, Yale School of Management.
  9. Stijn Van Nieuwerburgh & Laura Veldkamp, 2010. "Information Acquisition and Under-Diversification," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 779-805.
  10. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July.
  11. Hyeng Keun Koo, 1999. "Consumption and portfolio selection with labor income: A discrete-time approach," Computational Statistics, Springer, vol. 50(2), pages 219-243, October.
  12. Duffie, Darrell & Fleming, Wendell & Soner, H. Mete & Zariphopoulou, Thaleia, 1997. "Hedging in incomplete markets with HARA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 753-782, May.
  13. Alok Kumar, 2009. "Who Gambles in the Stock Market?," Journal of Finance, American Finance Association, vol. 64(4), pages 1889-1933, 08.
  14. Lorenzo Garlappi & Georgios Skoulakis, 2010. "Solving Consumption and Portfolio Choice Problems: The State Variable Decomposition Method," Review of Financial Studies, Society for Financial Studies, vol. 23(9), pages 3346-3400.
  15. Todd Mitton & Keith Vorkink, 2007. "Equilibrium Underdiversification and the Preference for Skewness," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1255-1288.
  16. Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2002. "Stocks are special too: an analysis of the equity lending market," Journal of Financial Economics, Elsevier, Elsevier, vol. 66(2-3), pages 241-269.
  17. Zoran Ivkovich & Clemens Sialm & Scott Weisbenner, 2004. "Portfolio Concentration and the Performance of Individual Investors," NBER Working Papers 10675, National Bureau of Economic Research, Inc.
  18. Tepla, Lucie, 2000. "Optimal portfolio policies with borrowing and shortsale constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1623-1639, October.
  19. Gallmeyer, Michael F. & Kaniel, Ron & Tompaidis, Stathis, 2006. "Tax management strategies with multiple risky assets," Journal of Financial Economics, Elsevier, Elsevier, vol. 80(2), pages 243-291, May.
  20. He, Hua & Pages, Henri F, 1993. "Labor Income, Borrowing Constraints, and Equilibrium Asset Prices," Economic Theory, Springer, vol. 3(4), pages 663-96, October.
  21. Nicole El Karoui & Monique Jeanblanc-Picqué, 1998. "Optimization of consumption with labor income," Finance and Stochastics, Springer, vol. 2(4), pages 409-440.
  22. Cox, John C. & Huang, Chi-fu, 1989. "Optimal consumption and portfolio policies when asset prices follow a diffusion process," Journal of Economic Theory, Elsevier, vol. 49(1), pages 33-83, October.
  23. Kelly, Morgan, 1995. "All their eggs in one basket: Portfolio diversification of US households," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 87-96, June.
  24. Peter Fortune, 2000. "Margin requirements, margin loans, and margin rates: practice and principles," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 19-44.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Elisabeth Beckmann & Mariya Hake & Jarmila Urvová, 2013. "Determinants of Households’ Savings in Central, Eastern and Southeastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 8-29.
  2. Turan G. Bali & Nusret Cakici & Robert F. Whitelaw, 2013. "Hybrid Tail Risk and Expected Stock Returns: When Does the Tail Wag the Dog?," NBER Working Papers 19460, National Bureau of Economic Research, Inc.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:109:y:2013:i:3:p:775-796. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.