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Ambiguity aversion and household portfolio choice puzzles: Empirical evidence

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  • Dimmock, Stephen G.
  • Kouwenberg, Roy
  • Mitchell, Olivia S.
  • Peijnenburg, Kim

Abstract

We test the relation between ambiguity aversion and five household portfolio choice puzzles: nonparticipation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative US household survey, we measure ambiguity preferences using custom-designed questions based on Ellsberg urns. As theory predicts, ambiguity aversion is negatively associated with stock market participation, the fraction of financial assets in stocks, and foreign stock ownership, but it is positively related to own-company stock ownership. Conditional on stock ownership, ambiguity aversion is related to portfolio under-diversification, and during the financial crisis, ambiguity-averse respondents were more likely to sell stocks.

Suggested Citation

  • Dimmock, Stephen G. & Kouwenberg, Roy & Mitchell, Olivia S. & Peijnenburg, Kim, 2016. "Ambiguity aversion and household portfolio choice puzzles: Empirical evidence," Journal of Financial Economics, Elsevier, vol. 119(3), pages 559-577.
  • Handle: RePEc:eee:jfinec:v:119:y:2016:i:3:p:559-577
    DOI: 10.1016/j.jfineco.2016.01.003
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    Keywords

    Ambiguity aversion; Stock market participation; Household portfolio puzzles; Home-bias; Own-company stock puzzle; Portfolio under-diversification; Household finance; Financial literacy;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods

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