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Equity Fund Ownership and the Cross-Regional Diversification of Household Risk

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Author Info
Sascha O. Becker ()
Mathias Hoffmann ()

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Abstract

We explore the link between portfolio home bias and consumption risk sharing among Italian regions using aggregated household level information on consumption, income and portfolio holdings. We propose to use data on equity fund ownership to proxy for regional home bias: equity funds are typically diversified at the national or international level and will therefore provide interregional diversification. In assessing the impact of equity fund ownership on interregional risk sharing we distinguish between two dimensions: variation in the share of equity funds in fund-holder's wealth (the intensive margin) and variation in the fraction of households that hold funds (the extensive margin). We find that equity fund ownership is an important determinant of interregional risk sharing. First, diversification incentives qualitatively line up with actually observed portfolio choices: fund holders in regions where households are particularly exposed to region-specific labor income risk hold a larger fraction of their wealth in (out-of-region) funds. Secondly, for a region as a whole, risk sharing increases in both the intensive and the extensive margins of diversification and the two margins reinforce each other. The marginal effect of wider equity fund participation seems particularly strong, suggesting that policies aimed at increasing equity market participation could help foster better interregional risk sharing.

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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 2205.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2205

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Related research
Keywords: consumption risk sharing regional home bias survey of household income and wealth labor income risk portfolio choice stock market participation

Find related papers by JEL classification:
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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