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Return Expectations and Risk Aversion Heterogeneity in Household Portfolios

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  • Alessandro Bucciol

    (Department of Economics (University of Verona))

  • Raffaele Miniaci

    (University of Brescia)

  • Sergio Pastorello

    (University of Bologna)

Abstract

We develop a structural econometric model to elicit household-specific expectations about future financial asset returns and risk attitudes by using data on observed portfolio holdings and self-assessed willingness to bear financial risk. Our framework assumes that household portfolios are subject to short-selling constraints in stocks and bonds, and that financial investment decisions are taken conditional on real estate and business wealth. We derive an explicit solution for the model, and estimate its parameters using the US Survey of Consumer Finances from 1995 to 2010. The results show that our modified mean-variance model fits the data adequately, and that the demographic, occupational and educational characteristics of the investors are relevant in shaping risk aversion and return expectations. In contrast, wealth, income, and past market performance have limited impacts on expectations and risk aversion.

Suggested Citation

  • Alessandro Bucciol & Raffaele Miniaci & Sergio Pastorello, 2015. "Return Expectations and Risk Aversion Heterogeneity in Household Portfolios," Working Papers 01/2015, University of Verona, Department of Economics.
    • Handle: RePEc:ver:wpaper:01/2015
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    3. Gaganis, Chrysovalantis & Hasan, Iftekhar & Pasiouras, Fotios, 2020. "National culture and housing credit," Journal of Empirical Finance, Elsevier, vol. 56(C), pages 19-41.
    4. Alceu Souza & Ariane Maria Machado de Oliveira & Dayla Karolina Fossile & Emmanuel Óguchi Ogu & Luciano Luiz Dalazen & Claudimar Pereira da Veiga, 2020. "Business Plan Analysis Using Multi-Index Methodology: Expectations of Return and Perceived Risks," SAGE Open, , vol. 10(1), pages 21582440199, January.
    5. Chenyu Kang & Ridong Hu, 2022. "Age structure of the population and the choice of household financial assets," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 35(1), pages 2889-2905, December.
    6. Feng, Xiangnan & Lu, Bin & Song, Xinyuan & Ma, Shuang, 2019. "Financial literacy and household finances: A Bayesian two-part latent variable modeling approach," Journal of Empirical Finance, Elsevier, vol. 51(C), pages 119-137.
    7. Xiaonan Chen & Jianfeng Song, 2022. "Influence Path Analysis of Rural Household Portfolio Selection: A Empirical Study Using Structural Equation Modelling Method," The Journal of Real Estate Finance and Economics, Springer, vol. 64(2), pages 298-322, February.
    8. Alessandro Bucciol & Raffaele Miniaci, 2012. "Financial Risk Aversion, Economic Crises and Past Risk Perception," Working Papers 28/2012, University of Verona, Department of Economics.
    9. Hermansson, Cecilia & Jonsson, Sara, 2021. "The impact of financial literacy and financial interest on risk tolerance," Journal of Behavioral and Experimental Finance, Elsevier, vol. 29(C).

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    More about this item

    Keywords

    Household Finance; Risk Aversion; Expectations; Mean Variance Analysis; Truncated and Censored Models;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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