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Health status and portfolio choice: Causality or heterogeneity?

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  • Fan, Elliott
  • Zhao, Ruoyun

Abstract

This paper explores the role of unobserved individual characteristics in the health-assets and health-portfolio correlations. We apply various econometrics models to a unique longitudinal dataset with rich information that allows for the exploitation of four different health indices. Our findings show strong cross-sectional correlations between health and both financial and non-financial assets, but these correlations seem to be mainly driven by heterogeneity as the correlations largely disappear in the fixed-effects model. Adverse health shocks, however, are found to motivate a safer portfolio choice even after individual fixed-effects are controlled for - a result consistent with the prediction made by the background risk theory. Our findings suggest that health shocks shift investment from risky assets toward other financial assets, but keep the total financial assets unchanged.

Suggested Citation

  • Fan, Elliott & Zhao, Ruoyun, 2009. "Health status and portfolio choice: Causality or heterogeneity?," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1079-1088, June.
  • Handle: RePEc:eee:jbfina:v:33:y:2009:i:6:p:1079-1088
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    References listed on IDEAS

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    Cited by:

    1. Bertocchi, Graziella & Brunetti, Marianna & Torricelli, Costanza, 2011. "Marriage and other risky assets: A portfolio approach," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2902-2915, November.
    2. Alghalith, Moawia, 2012. "The impact of background risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(24), pages 6506-6508.
    3. Jones, A.M.; & Rice, N.; & Robone, S.;, 2018. "The effect of health shocks on financial risk preferences differs by personality traits," Health, Econometrics and Data Group (HEDG) Working Papers 18/07, HEDG, c/o Department of Economics, University of York.
    4. Dana Goldman & Nicole Maestas, 2013. "Medical Expenditure Risk And Household Portfolio Choice," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(4), pages 527-550, June.
    5. Julien Hugonnier & Florian Pelgrin & Pascal St-Amour, 2009. "Health and (other) Asset Holdings," Swiss Finance Institute Research Paper Series 09-18, Swiss Finance Institute.
    6. Brown, Sarah & Gray, Daniel & Harris, Mark N. & Spencer, Christopher, 2016. "Portfolio Allocation, Income Uncertainty and Households' Flight from Risk," IZA Discussion Papers 10408, Institute for the Study of Labor (IZA).
    7. Julien Hugonnier & Florian Pelgrin & Pascal St-Amour, 2010. "A structural analysis of the health expenditures and portfolio choices of retired agents," Swiss Finance Institute Research Paper Series 10-29, Swiss Finance Institute.
    8. Kronenberg, C. & van Kippersluis, H. & Rohde, K.I.M., 2014. "What drives the association between health and portfolio choice?," Health, Econometrics and Data Group (HEDG) Working Papers 14/27, HEDG, c/o Department of Economics, University of York.
    9. Moawia Alghalith & Xu Guo & Wing-Keung Wong & Lixing Zhu, 2016. "A General Optimal Investment Model In The Presence Of Background Risk," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-8, March.
    10. Julien Hugonnier & Florian Pelgrin, 2013. "Health and (Other) Asset Holdings," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 663-710.
    11. Jiang, Chonghui & Ma, Yongkai & An, Yunbi, 2010. "An analysis of portfolio selection with background risk," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 3055-3060, December.
    12. Schendel, Lorenz S., 2014. "Critical illness insurance in life cycle portfolio problems," SAFE Working Paper Series 44, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    13. David A. Love & Paul A. Smith, 2010. "Does health affect portfolio choice?," Health Economics, John Wiley & Sons, Ltd., vol. 19(12), pages 1441-1460, December.
    14. repec:eee:joepsy:v:61:y:2017:i:c:p:191-202 is not listed on IDEAS
    15. Horneff, Wolfram J. & Maurer, Raimond H. & Mitchell, Olivia S. & Stamos, Michael Z., 2009. "Asset allocation and location over the life cycle with investment-linked survival-contingent payouts," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1688-1699, September.
    16. Maude Toussaint-Comeau & Jonathan Hartley, 2009. "Health and the savings of insured versus uninsured, working-age households in the U.S," Working Paper Series WP-09-23, Federal Reserve Bank of Chicago.
    17. Xu, Guo & Wing-Keung, Wong & Lixing, Zhu, 2013. "Comparisons and Characterizations of the Mean-Variance, Mean-VaR, Mean-CVaR Models for Portfolio Selection With Background Risk," MPRA Paper 51827, University Library of Munich, Germany.
    18. Christian E. Weller & Jeffrey Wenger, 2010. "Easy Money? Health and 401(k) Loans," Working Papers wp231, Political Economy Research Institute, University of Massachusetts at Amherst.
    19. Vicki L. Bogan & Angela R. Fertig, 2013. "Portfolio Choice and Mental Health," Review of Finance, European Finance Association, vol. 17(3), pages 955-992.
    20. Hugonnier, J. & Pelgrin, F. & St-Amour, P., 2016. "Closing Down the Shop: Optimal Health and Wealth Dynamics near the End of Life," Health, Econometrics and Data Group (HEDG) Working Papers 16/28, HEDG, c/o Department of Economics, University of York.

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