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Financial Risk Aversion and Household Asset Diversification

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Author Info
Barasinska, Nataliya () (DIW Berlin)
Schäfer, Dorothea (DIW Berlin)
Stephan, Andreas (CESIS and JIBS)

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Abstract

This paper explores the relationship between risk attitude and asset diversifcation in household portfolios. We first examine the impact of manifested risk aversion on the total number of distinct assets held in a portfolio (naive diversification). The second part of the paper focuses on a more sophisticated strategy of diversification and asks whether financial theory is compatible with observed diversification patterns. Based on the German Socioeconomic Panel which provides unique measures of individual propensity for taking risk, the results of the regression analysis show that, along with some socioeconomic characteristics, the propensity for taking investment risk is an important predictor of a household's diversification strategy. However, some of our findings are strongly at odds with what the concept of mean-variance utility suggests.

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Publisher Info
Paper provided by Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies in its series Working Paper Series in Economics and Institutions of Innovation with number 137.

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Length: 29 pages
Date of creation: 09 Sep 2008
Date of revision:
Handle: RePEc:hhs:cesisp:0137

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Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden
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Related research
Keywords: household finances; diversification; financial portfolio;

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Find related papers by JEL classification:
D14 - Microeconomics - - Household Behavior - - - Personal Finance
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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References listed on IDEAS
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    Other versions:
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  6. Hartog, Joop & Ferrer-i-Carbonell, Ada & Jonker, Nicole, 2002. "Linking Measured Risk Aversion to Individual Characteristics," Kyklos, Blackwell Publishing, vol. 55(1), pages 3-26.
  7. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Francisco Gomes & Alexander Michaelides, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," Journal of Finance, American Finance Association, vol. 60(2), pages 869-904, 04. [Downloadable!] (restricted)
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  12. William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2001. "Long-Term Global Market Correlations," Yale School of Management Working Papers ysm237, Yale School of Management. [Downloadable!]
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  13. Fellner, Gerlinde & Maciejovsky, Boris, 2007. "Risk attitude and market behavior: Evidence from experimental asset markets," Journal of Economic Psychology, Elsevier, vol. 28(3), pages 338-350, June. [Downloadable!] (restricted)
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  14. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December. [Downloadable!] (restricted)
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  22. Hochguertel, Stefan & Alessie, Rob & van Soest, Arthur, 1997. " Saving Accounts versus Stocks and Bonds in Household Portfolio Allocation," Scandinavian Journal of Economics, Blackwell Publishing, vol. 99(1), pages 81-97, March. [Downloadable!] (restricted)
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