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Wealth and Portfolio Composition: Theory and Evidence

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  • Mervyn A. King
  • Jonathan I. Leape
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    Abstract

    In this paper, we examine a new survey of 6,010 U.S.households and estimate a model for the allocation of total net worth among different assets. The paper has three main aims. The first is to investigate the extent to which a conventional portfolio choice model can explain the differences in portfolio composition among households. Our survey data show that most households hold only a subset of the available assets. Hence we analyze a model in which investors choose to hold incomplete portfolios. We show that the empirical specification of the joint discrete and continuous choice that characterizes household portfolio behavior is a switching regressions model with endogenous switching. The second aim is to examine the impact of taxes on portfolio composition. The survey contains a great deal of information on taxable incomes and deductions which enable us to calculate rather precisely the marginal tax rate facing each household.The third aim is to estimate wealth elasticities of demand for a range of assets and liabilities. We test the frequently made assumption of constant relative risk aversion.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1468.

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    Date of creation: Sep 1984
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    Publication status: published as King, Mervyn and Jonathan I. Leape. "Wealth And Portfolio Composition: Theory And Evidence," Journal of Public Economics, 1998, v69(2,Aug), 155-193.
    Handle: RePEc:nbr:nberwo:1468

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    1. Zvi Bodie, 1982. "Investment Strategy in an Inflationary Environment," NBER Working Papers, National Bureau of Economic Research, Inc 0701, National Bureau of Economic Research, Inc.
    2. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, American Finance Association, vol. 30(2), pages 585-603, May.
    3. Feldstein, Martin S, 1976. "Personal Taxation and Portfolio Composition: An Econometric Analysis," Econometrica, Econometric Society, Econometric Society, vol. 44(4), pages 631-50, July.
    4. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, Elsevier, vol. 21(3), pages 263-285, April.
    5. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 14, Cowles Foundation for Research in Economics, Yale University.
    6. Conniffe, Denis, 1983. "Small-Sample Properties of Estimators of Regression Coefficients Given a Common Pattern of Missing Data," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 50(1), pages 111-20, January.
    7. Levy, Haim, 1978. "Equilibrium in an Imperfect Market: A Constraint on the Number of Securities in the Portfolio," American Economic Review, American Economic Association, American Economic Association, vol. 68(4), pages 643-58, September.
    8. Uhler, R S & Cragg, John G, 1971. "The Structure of the Asset Portfolios of Households," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(115), pages 341-57, July.
    9. James J. Heckman, 1976. "The Common Structure of Statistical Models of Truncation, Sample Selection and Limited Dependent Variables and a Simple Estimator for Such Models," NBER Chapters, National Bureau of Economic Research, Inc, in: Annals of Economic and Social Measurement, Volume 5, number 4, pages 475-492 National Bureau of Economic Research, Inc.
    10. Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, Econometric Society, vol. 52(2), pages 345-62, March.
    11. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 58, Massachusetts Institute of Technology (MIT), Department of Economics.
    12. Goldsmith, David, 1976. "Transactions Costs and the Theory of Portfolio Selection," Journal of Finance, American Finance Association, American Finance Association, vol. 31(4), pages 1127-39, September.
    13. Gourieroux, Christian & Monfort, Alain, 1981. "On the Problem of Missing Data in Linear Models," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(4), pages 579-86, October.
    14. Daniel R. Feenberg & Harvey S. Rosen, 1983. "Alternative Tax Treatments of the Family: Simulation Methodology and Results," NBER Chapters, National Bureau of Economic Research, Inc, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 7-46 National Bureau of Economic Research, Inc.
    15. Auerbach, Alan J & King, Mervyn A, 1983. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(4), pages 587-609, November.
    16. Mayshar, Joram, 1979. "Transaction Costs in a Model of Capital Market Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(4), pages 673-700, August.
    17. Zvi Griliches, 1984. "Data Problems in Econometrics," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0039, National Bureau of Economic Research, Inc.
    18. Brennan, M. J., 1975. "The Optimal Number of Securities in a Risky Asset Portfolio When There Are Fixed Costs of Transacting: Theory and Some Empirical Results," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 10(03), pages 483-496, September.
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