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Channels of Risk Sharing at Micro Level: Savings, Investments and Risk Aversion Heterogeneity

Author

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  • Faruk Balli
  • Filippo Maria Pericoli
  • Eleonora Pierucci

Abstract

Applying the variance decomposition developed by Asdrubali et al. (1996), the paper explores for the first time the role and the extent of smoothing channels at a micro level using a sample of UK households. Our empirical analysis of British Household Panel Survey (BHPS) data concludes that the bulk of risk-sharing in the UK is driven by the savings channel. By allowing for risk aversion heterogeneity, we detect an inverted U-shaped relationship between risk aversion and the extent of smoothing achieved through financial markets. We also analyze the issue of risk-sharing by income, education levels and by region. We find that risk-sharing is more effective (higher) for individuals whose savings are more flexible, while it is less effective (lower) for individuals characterized by relatively more stable savings rate (like the Scottish population), regardless of their economic conditions.
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Suggested Citation

  • Faruk Balli & Filippo Maria Pericoli & Eleonora Pierucci, 2016. "Channels of Risk Sharing at Micro Level: Savings, Investments and Risk Aversion Heterogeneity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(1), pages 90-104, January.
    • Handle: RePEc:wly:ijfiec:v:21:y:2016:i:1:p:90-104
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    Cited by:

    1. Balli, Faruk & De Bruin, Anne & Balli, Hatice Ozer & Karimov, Jamshid, 2020. "Corporate net income and payout smoothing under Shari'ah compliance," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    2. Pierfederico Asdrubali & Simone Tedeschi & Luigi Ventura, 2020. "Household risk‐sharing channels," Quantitative Economics, Econometric Society, vol. 11(3), pages 1109-1142, July.
    3. Inmaculada Aguiar-Díaz & María Victoria Ruiz-Mallorqui, 2022. "Private Health Insurance and Financial Risk Taking in Spain—The Moderating Effect of Subjective Risk Tolerance," IJERPH, MDPI, vol. 19(23), pages 1-13, December.
    4. Inmaculada Aguiar-Díaz & José Ramón Zagalaz-Jiménez, 2025. "Gap profile between subjective and objective financial risk tolerance," Risk Management, Palgrave Macmillan, vol. 27(4), pages 1-26, December.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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