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Twin Picks: Disentangling the Determinants of Risk-Taking in Household Portfolios

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  • Laurent E. Calvet
  • Paolo Sodini

Abstract

This paper investigates the determinants of financial risk-taking in a panel containing the asset holdings of Swedish twins. We measure the impact of a broad set of demographic, financial, and portfolio characteristics, and use yearly twin pair fixed effects to control for genes and shared background. We report a strong positive relation between risky asset market participation and financial wealth. Among participants, the average financial wealth elasticity of the risky share is significantly positive and estimated at 22%, which suggests that the average individual investor has decreasing relative risk aversion. Furthermore, the financial wealth elasticity of the risky share itself is heterogeneous across investors and varies strongly with characteristics. The elasticity decreases with financial wealth and human capital, and increases with habit, real estate wealth and household size. As a consequence, the elasticity of the aggregate demand for risky assets to exogenous wealth shocks is close to, but does not coincide with, the elasticity of a representative investor with constant relative risk aversion. We confirm the robustness of our results by running time-differenced instrumental variable regressions, and by controlling for zygosity, lifestyle, mental and physical health, the intensity of communication between twins, and measures of social interactions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15859.

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Date of creation: Apr 2010
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Handle: RePEc:nbr:nberwo:15859

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Cited by:
  1. Anna Dreber & David Rand & Nils Wernerfelt & Justin Garcia & Miguel Vilar & J. Lum & Richard Zeckhauser, 2011. "Dopamine and risk choices in different domains: Findings among serious tournament bridge players," Journal of Risk and Uncertainty, Springer, vol. 43(1), pages 19-38, August.
  2. Dreber, Anna & Rand, David Gertler & Wernerfelt, Nils Christian & Garcia, Justin & Lum, J. Koji & Zeckhauser, Richard Jay, 2011. "The Dopamine Receptor D4 Gene (DRD4) and Self-Reported Risk Taking in the Economic Domain," Scholarly Articles 5347066, Harvard Kennedy School of Government.
  3. Guiso, Luigi & Sodini, Paolo, 2012. "Household Finance: An Emerging Field," CEPR Discussion Papers 8934, C.E.P.R. Discussion Papers.
  4. Barnea, Amir & Cronqvist, Henrik & Siegel, Stephan, 2010. "Nature or Nurture: What Determines Investor Behavior?," SIFR Research Report Series 72, Institute for Financial Research.
  5. Maier, Johannes & Rüger, Maximilian, 2010. "Measuring Risk Aversion Model-Independently," Discussion Papers in Economics 11873, University of Munich, Department of Economics.

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