Advanced Search
MyIDEAS: Login

Do Disaster Expectations Explain Household Portfolios?

Contents:

Author Info

  • Sule Alan

    ()
    (Koc University CASE)

Registered author(s):

    Abstract

    It has been argued that rare economic disasters can explain most asset pricing puzzles. If this is the case, perceived risk associated with a disaster in stock markets should be revealed in household portfolios. That is, the framework that solves these pricing puzzles should also generate quantities that are consistent with the observed ones. This paper estimates the perceived risk of disasters (both probability and expected size) that is consistent with observed portfolios and consumption growth between 1983 and 2004 in the United States. I find that the portfolio choice of households that have less than a college degree can be partially explained by expectations of stock markets disasters only if one allows for a large probability of labor income loss at the same time. Such disaster expectations however, are not revealed in the portfolios of educated and wealthier households; simple per-period participation costs to stock market coupled with preference heterogeneity explain their participation and investment patterns.

    Download Info

    If 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.
    File URL: http://eaf.ku.edu.tr/sites/eaf.ku.edu.tr/files/erf_wp_1127.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1127.

    as in new window
    Length: 51 pages
    Date of creation: Oct 2011
    Date of revision:
    Handle: RePEc:koc:wpaper:1127

    Contact details of provider:
    Postal: Rumelifeneri Yolu, Sarıyer, 34450 İstanbul
    Phone: (90+212)-338-1302
    Fax: (90+212)-338-1393
    Email:
    Web page: http://erf.ku.edu.tr
    More information through EDIRC

    Related research

    Keywords:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Sule Alan, 2005. "Entry costs and stock market participation over the life cycle," IFS Working Papers W05/01, Institute for Fiscal Studies.
    2. Gomes, Francisco J & Michaelides, Alexander, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," CEPR Discussion Papers 4853, C.E.P.R. Discussion Papers.
    3. Javier Alvarez & Martin Browning & Mette Ejrnæs, 2002. "Modelling income processes with lots of heterogeneity," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 D2-3, International Conferences on Panel Data.
    4. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
    5. Michael Haliassos & Alexander Michaelides, 2003. "Portfolio Choice and Liquidity Constraints," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 143-177, February.
    6. repec:att:wimass:9722 is not listed on IDEAS
    7. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
    8. Xavier Gabaix, 2008. "Variable Rare Disasters: A Tractable Theory of Ten Puzzles in Macro-finance," American Economic Review, American Economic Association, vol. 98(2), pages 64-67, May.
    9. Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
    10. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
    11. Cagetti, Marco, 2003. "Wealth Accumulation over the Life Cycle and Precautionary Savings," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(3), pages 339-53, July.
    12. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    13. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
    14. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
    15. Christopher D. Carroll & Andrew A. Samwick, 1995. "The Nature of Precautionary Wealth," NBER Working Papers 5193, National Bureau of Economic Research, Inc.
    16. Sule Alan & Martin Browning, 2003. "Estimating Intertemporal Allocation Parameters using Simulated Residual Estimation," CAM Working Papers 2003-03, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
    17. Orazio Attanasio & James Banks & Costas Meghir & Guglielmo Weber, 1995. "Humps and bumps in lifetime consumption," IFS Working Papers W95/14, Institute for Fiscal Studies.
    18. Bound, John, et al, 1994. "Evidence on the Validity of Cross-Sectional and Longitudinal Labor Market Data," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 345-68, July.
    19. John Rust & Hui Man Chan & George Hall, 2004. "Price Discrimination in the Steel Market," Econometric Society 2004 North American Summer Meetings 245, Econometric Society.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:koc:wpaper:1127. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sumru Oz).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.