Precautionary saving, financial risk and portfolio choice
Relying on a direct question about the desired amount of precautionary wealth from the 2002 wave of the Italian Survey of Household Income and Wealth, I assess the main determinants of precautionary motive for saving. In particular, I focus on the role played by financial risk on households' saving decisions. Actually, households investing mainly in safe assets do not need to protect themselves against future and unexpected financial losses. Consequently, controlling for households' sources of risk beside financial ones, the amount of precautionary savings of a household who invest exclusively in safe assets should be lower compared to households who instead detain a non-negligible share of risky assets in their portfolio. Moreover, portfolio diversification, reducing households' total exposure to financial risk, should reduce the amount of wealth households need to save for precautionary reasons. In this paper, I provide an empirical assessment of the linkage existing between the composition of households' portfolio and the amount of wealth households wish to have to protect themselves against unexpected contingencies. As expected, a strong and negative correlation exists between the desired amount of precautionary wealth and the ownership of a portfolio made exclusively of safe assets. However, households do not seem to use portfolio diversification to reduce exposure to total risk. Finally, I address the issue of complementarity vs. substitution between formal and informal insurance schemes. Actually, trust in capital market would lower substantially the amount of wealth households wish to detain for precautionary reasons. However, there is no evidence in favour of a negative and strong linkage between precautionary saving and insurance.
|Date of creation:||2010|
|Contact details of provider:|| Postal: Via S. Giorgio 12, I-09124 Cagliari|
Web page: http://www.crenos.unica.it/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:cns:cnscwp:201001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Antonello Pau)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.