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Habit Formation and Persistence in Individual Asset Portfolio Holdings

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  • Sònia Muñoz
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    Abstract

    This paper uses six waves of the Bank of Italy Survey of Households Income and Wealth to explore the dynamics of asset portfolio ownership. The household asset portfolio decision is a choice among discrete alternatives, and I model the problem in a multinomial framework. I focus on a particularly important feature of household portfolio behavior: the infrequency of portfolio allocation changes. I find evidence of strong unobserved heterogeneity through time-varying error components, which I interpret as taste persistence in both the risky and safe asset participation decisions. I estimate the model using the method of maximum smoothly simulated likelihood.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/29.

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    Length: 44
    Date of creation: 01 Jan 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/29

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    Related research

    Keywords: Asset management; Stock markets; Economic models; bonds; financial assets; correlation; probability; probabilities; covariance; survey; equation; statistics; stock market; correlations; government bonds; autocorrelation; integral; econometrics; heteroscedasticity; financial markets; dummy variables; stockholders; integrals; corporate bonds; binary choice; significance levels; savings deposits; foreign stocks; structural analysis; zero-coupon bonds; cumulative distribution function; standard errors; stock ownership; coupon bonds; goodness of fit; foreign bonds; binary choice model; optimization; financial innovation; predictability; probability density function; statistic; treasury bonds; sample selection; normal distribution; computational complexity; estimation procedure; data analysis; probability density; sampling; maximum likelihood estimation; covariances; estimation method; statistical models; financial economics; stock market fluctuations;

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    1. Alessie, R.J.M. & Hochgürtel, S. & Soest, A.H.O. van, 2004. "Ownership of stocks and mutual funds: A panel data analysis," Open Access publications from Tilburg University urn:nbn:nl:ui:12-140722, Tilburg University.
    2. King, Mervyn A. & Leape, Jonathan I., 1998. "Wealth and portfolio composition: Theory and evidence," Journal of Public Economics, Elsevier, Elsevier, vol. 69(2), pages 155-193, June.
    3. Francisco Gomes & Alexander Michaelides, 2003. "Portfolio Choice With Internal Habit Formation: A Life-Cycle Model With Uninsurable Labor Income Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 729-766, October.
    4. Vassilis A. Hajivassiliou & Yannis M. Ioannides, 1995. "Unemployment and Liquidity Constraints," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1090, Cowles Foundation for Research in Economics, Yale University.
    5. Guiso, Luigi & Jappelli, Tullio, 2000. "Household Portfolios in Italy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2549, C.E.P.R. Discussion Papers.
    6. Heckman, James J, 1991. "Identifying the Hand of the Past: Distinguishing State Dependence from Heterogeneity," American Economic Review, American Economic Association, American Economic Association, vol. 81(2), pages 75-79, May.
    7. Poterba, J.M. & Samwick, A.A., 1996. "Stock Ownership Patterns, Stock Market Fluctuations, and Consumption," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 96-2, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. Orazio Attanasio & James Banks & Sarah Tanner, 1998. "Asset Holding and Consumption Volatility," NBER Working Papers 6567, National Bureau of Economic Research, Inc.
    9. 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.
    10. Vassilis A. Hajivassiliou & Axel Borsch-Supan, 1990. "Smooth Unbiased Multivariate Probability Simulators for Maximum Likelihood Estimation of Limited Dependent Variable Models," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 960, Cowles Foundation for Research in Economics, Yale University.
    11. Attanasio, Orazio & Guiso, Luigi & Jappelli, Tullio, 1998. "The Demand for Money, Financial Innovation and the Welfare Cost of Inflation: An Analysis with Households' Data," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1927, C.E.P.R. Discussion Papers.
    12. McFadden, Daniel, 1974. "The measurement of urban travel demand," Journal of Public Economics, Elsevier, Elsevier, vol. 3(4), pages 303-328, November.
    13. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers, C.E.P.R. Discussion Papers 888, C.E.P.R. Discussion Papers.
    14. Axel Borsch-Supan & Vassilis Hajivassiliou & Laurence J. Kotlikoff & John N. Morris, 1990. "Health, Children, and Elderly Living Arrangements: A Multiperiod-Multinomial Probit Model with Unobserved Heterogeneity and Autocorrelated Errors," NBER Working Papers 3343, National Bureau of Economic Research, Inc.
    15. Vassilis A. Hajivassiliou & Daniel L. McFadden, 1998. "The Method of Simulated Scores for the Estimation of LDV Models," Econometrica, Econometric Society, Econometric Society, vol. 66(4), pages 863-896, July.
    16. Luigi Guiso & Michael Haliassos & Tullio Jappelli, 2003. "Household stockholding in Europe: where do we stand and where do we go?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(36), pages 123-170, 04.
    17. N. Gregory Mankiw & Stephen P. Zeldes, 1990. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc.
    18. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
    19. Arellano, Manuel & Carrasco, Raquel, 2003. "Binary choice panel data models with predetermined variables," Journal of Econometrics, Elsevier, Elsevier, vol. 115(1), pages 125-157, July.
    20. Perraudin, William R. M. & Sorensen, Bent E., 2000. "The demand for risky assets: Sample selection and household portfolios," Journal of Econometrics, Elsevier, Elsevier, vol. 97(1), pages 117-144, July.
    21. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(432), pages 1110-29, September.
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