Hedging, Familiarity and Portfolio Choice
AbstractWe exploit the restrictions of intertemporal portfolio choice in the presence of non-financial income risk to design and implement tests of hedging that use the information contained in the actual portfolio of the investor. We use a unique dataset of Swedish investors with information broken down at the investor level and into various components of wealth, investor income, tax positions and investor demographic characteristics. Portfolio holdings are identified at the stock level. We show that investors do not engage in hedging, but invest in stocks closely related to their non-financial income. We explain this with familiarity, that is the tendency to concentrate holdings in stocks with which the investor is familiar in terms of geographical of professional proximity or that he has held for a long period. We show that familiarity is not a behavioral bias, but is information-driven. Familiarity-based investment allows investors to earn higher returns than they would have otherwise earned if they had hedged.
Download InfoIf 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.
Bibliographic InfoPaper provided by Institute for Financial Research in its series SIFR Research Report Series with number 21.
Length: 70 pages
Date of creation: 15 Mar 2004
Date of revision:
Contact details of provider:
Postal: Institute for Financial Research Drottninggatan 89, SE-113 60 Stockholm, Sweden
Web page: http://www.sifr.org/
More information through EDIRC
Asset pricing; Portfolio decision; Hedging;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-02 (All new papers)
- NEP-EEC-2004-06-02 (European Economics)
- NEP-FIN-2004-06-02 (Finance)
- NEP-FMK-2004-05-26 (Financial Markets)
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statistics
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anki Helmer).
If references are entirely missing, you can add them using this form.