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Health status and portfolio choice: Causality or heterogeneity?

  • Fan, Elliott
  • Zhao, Ruoyun

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.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 6 (June)
Pages: 1079-1088

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:6:p:1079-1088
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Dora L. Costa, 1994. "Health and Labor Force Participation of Older Men, 1900-1991," NBER Working Papers 4929, National Bureau of Economic Research, Inc.
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  11. James P. Smith, 1999. "Healthy Bodies and Thick Wallets: The Dual Relation between Health and Economic Status," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 145-166, Spring.
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  13. Peter Adams & Michael D. Hurd & Daniel L. McFadden & Angela Merrill & Tiago Ribeiro, 2004. "Healthy, Wealthy, and Wise? Tests for Direct Causal Paths between Health and Socioeconomic Status," NBER Chapters, in: Perspectives on the Economics of Aging, pages 415-526 National Bureau of Economic Research, Inc.
  14. Angus S. Deaton & Christina Paxson, 1998. "Health, Income, and Inequality over the Life Cycle," NBER Chapters, in: Frontiers in the Economics of Aging, pages 431-462 National Bureau of Economic Research, Inc.
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  17. Buly A Cardak & Roger K. Wilkins, 2008. "The Determinants of Household Risky Asset Holdings: Australian Evidence on Background Risk and Other Factors#," Working Papers 2008.05, School of Economics, La Trobe University.
  18. EECKHOUDT, Louis & Christian GOLLIER & Harris SCHLESINGER, 1994. "Changes in Background Risk and Risk Taking Behavior," Working Papers 005, Risk and Insurance Archive.
  19. Normandin, Michel & St-Amour, Pascal, 2008. "An empirical analysis of aggregate household portfolios," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1583-1597, August.
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