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Return expectations and risk aversion heterogeneity in household portfolios

Author

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  • Bucciol, Alessandro
  • Miniaci, Raffaele
  • Pastorello, Sergio

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 2013. 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

  • Bucciol, Alessandro & Miniaci, Raffaele & Pastorello, Sergio, 2017. "Return expectations and risk aversion heterogeneity in household portfolios," Journal of Empirical Finance, Elsevier, vol. 40(C), pages 201-219.
  • Handle: RePEc:eee:empfin:v:40:y:2017:i:c:p:201-219
    DOI: 10.1016/j.jempfin.2016.08.002
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    1. repec:eee:empfin:v:51:y:2019:i:c:p:119-137 is not listed on IDEAS

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    Keywords

    Household finance; Risk aversion; Expectations; Mean variance analysis; Truncated and censored models;

    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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