Risk Management, Liquidity Constraints, and the Demand for Risky Assets in France

In a prevailing climate of increasing uncertainty (rising risk of unemployment, pension funding problems and unstable family structures), French households have adopted new saving behavior reflected during the nineties, primarily by considerable investment in life insurance and its derivative products (more than 50 percent of financial saving). Recent theoretical saving models have placed greater emphasis on studying prudent behavior in the face of an uncertain future and have shown the influences of multiple risks and borrowing constraints on portfolio choices. In this vein, a household exposed to a high future income risk or strong liquidity constraints may reduce its investments in risky assets and increase its share of liquid investments. Empirical tests on recent French data ("Patrimoine 97") show the relevance of these new factors to explain risky assets demand. Like theoretical models predict, we observe a negative impact of liquidity constraints on risky assets portfolio. But tests do not support the proposition that background risk depresses the willingness to bear other avoidable risks. Moreover, in opposition to this prediction, I find that when households are confronted with high income risk, they hold also a greater proportion of risky assets : income risk and portfolio risk are not substitute.