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Revisiting the composition puzzles of the household portfolio: New evidence

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  • Jin, Fangyi
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    Abstract

    This paper presents new evidence which contradicts the existence of the portfolio composition puzzles concerning household finance: portfolio risk increases empirically with age and wealth which contradicts Merton's (1971) solution. The puzzles cause serious problems when assessing the classical theoretical models that have been developed to rationalize households' portfolio choices. This paper investigates the 2005 Panel Study of Income Dynamics (PSID) data and shows that, when the household portfolio includes real estate and private business and allows for leverage, the portfolio risk for young and low-wealth households is in general higher than that in older and richer households, which is consistent with the predictions of classical models.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1058330011000115
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    Bibliographic Info

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

    Volume (Year): 20 (2011)
    Issue (Month): 2 (May)
    Pages: 63-73

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    Handle: RePEc:eee:revfin:v:20:y:2011:i:2:p:63-73

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    Web page: http://www.elsevier.com/locate/inca/620170

    Related research

    Keywords: Household portfolio Composition puzzle Leverage;

    References

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    1. Annette Vissing-Jorgensen, 2002. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," NBER Working Papers 8884, National Bureau of Economic Research, Inc.
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    3. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2007. "Portfolio choice over the life-cycle when the stock and labor markets are cointegrated," Working Paper Series WP-07-11, Federal Reserve Bank of Chicago.
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    7. 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.
    8. Markus K. Brunnermeier & Stefan Nagel, 2006. "Do Wealth Fluctuations Generate Time-varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation," NBER Working Papers 12809, National Bureau of Economic Research, Inc.
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    11. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
    12. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc.
    13. Marjorie Flavin & Takashi Yamashita, 2002. "Owner-Occupied Housing and the Composition of the Household Portfolio," American Economic Review, American Economic Association, vol. 92(1), pages 345-362, March.
    14. Alvin Y. So, 2002. "Guest Editor's Introduction," Chinese Economy, M.E. Sharpe, Inc., vol. 35(3), pages 3-25, May.
    15. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
    16. Rui Yao, 2005. "Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 197-239.
    17. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
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