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Wealth fluctuations and investment in risky assets: The UK micro evidence on households asset allocation

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  • Paya, Ivan
  • Wang, Peng

Abstract

This paper is the first to examine whether UK households exhibit constant or time-varying relative risk aversion within a microdata panel framework. We analyse whether portfolio allocations in risky assets change in response to fluctuations in wealth. Our set of controls for background wealth is comprehensive, and include, as a novelty in this type of studies, pension wealth. The inference about the risk profile of British households depends upon the relevant measure of background wealth. We do not find support for decreasing relative risk aversion (DRRA). Constant relative risk aversion (CRRA) prevails for the case of liquid wealth, but for the broadest definitions —those including home equity and pensions— the evidence favours increasing relative risk aversion (IRRA).

Suggested Citation

  • Paya, Ivan & Wang, Peng, 2016. "Wealth fluctuations and investment in risky assets: The UK micro evidence on households asset allocation," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 221-235.
  • Handle: RePEc:eee:empfin:v:38:y:2016:i:pa:p:221-235
    DOI: 10.1016/j.jempfin.2016.07.003
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    Cited by:

    1. Ñíguez, Trino-Manuel & Paya, Ivan & Peel, David, 2016. "Pure higher-order effects in the portfolio choice model," Finance Research Letters, Elsevier, vol. 19(C), pages 255-260.

    More about this item

    Keywords

    Relative risk aversion; Portfolio choice; Panel data; Pension wealth;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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