IDEAS home Printed from https://ideas.repec.org/p/diw/diwfin/diwfin6.1a.html
   My bibliography  Save this paper

Financial Risk Aversion and Household Asset Diversification

Author

Listed:
  • Nataliya Barasinska
  • Dorothea Schäfer
  • Andreas Stephan

Abstract

This paper explores the relationship between self-declared risk aversion of private investors and their willingness to hold diversified portfolios of financial assets. The analysis is based on household survey data from the German Socioeconomic Panel (SOEP) that provides a reliable measure of individual attitude towards financial risk. Our empirical findings suggest that more risk averse investors tend to hold incomplete portfolios that consist mainly of a few safe assets. We also find that for private households the propensity to diversify is highly dependent on whether liquidity and safety needs are satisfied.

Suggested Citation

  • Nataliya Barasinska & Dorothea Schäfer & Andreas Stephan, 2009. "Financial Risk Aversion and Household Asset Diversification," Working Paper / FINESS 6.1A, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwfin:diwfin6.1a
    as

    Download full text from publisher

    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.412914.de/diw_finess_06011.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christopher D Carroll, 1997. "Why Do the Rich Save So Much?," Economics Working Paper Archive 388, The Johns Hopkins University,Department of Economics.
    2. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
    3. James Banks & Tanner, Tanner, 2000. "Household portfolios in the UK," IFS Working Papers W00/14, Institute for Fiscal Studies.
    4. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
    5. Campbell, John Y. & Chan, Yeung Lewis & Viceira, Luis M., 2003. "A multivariate model of strategic asset allocation," Journal of Financial Economics, Elsevier, vol. 67(1), pages 41-80, January.
    6. Fellner, Gerlinde & Maciejovsky, Boris, 2007. "Risk attitude and market behavior: Evidence from experimental asset markets," Journal of Economic Psychology, Elsevier, vol. 28(3), pages 338-350, June.
    7. Hochguertel, Stefan & Alessie, Rob & van Soest, Arthur, 1997. " Saving Accounts versus Stocks and Bonds in Household Portfolio Allocation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(1), pages 81-97, March.
    8. King, Mervyn A. & Leape, Jonathan I., 1998. "Wealth and portfolio composition: Theory and evidence," Journal of Public Economics, Elsevier, vol. 69(2), pages 155-193, June.
    9. Hartog, Joop & Ferrer-i-Carbonell, Ada & Jonker, Nicole, 2002. "Linking Measured Risk Aversion to Individual Characteristics," Kyklos, Wiley Blackwell, vol. 55(1), pages 3-26.
    10. William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005. "Long-Term Global Market Correlations," The Journal of Business, University of Chicago Press, vol. 78(1), pages 1-38, January.
    11. John Y. Campbell, 2006. "Household Finance," Journal of Finance, American Finance Association, vol. 61(4), pages 1553-1604, August.
    12. Francisco Gomes & Alexander Michaelides, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," Journal of Finance, American Finance Association, vol. 60(2), pages 869-904, April.
    13. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Juergen Schupp & Gert Wagner, 2005. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," Working Papers 2096, The Field Experiments Website.
    14. John F. Henry & L. Randall Wray, 1998. "Economic Time," Macroeconomics 9811004, EconWPA.
    15. Luigi Guiso & Tullio Jappelli, 2000. "Household Portfolios in Italy," CSEF Working Papers 43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    16. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
    17. Henry, Jerome & Odonnat, Ivan & Ricart, Roland, 1992. "The financial behaviour of French households," Economic Modelling, Elsevier, vol. 9(3), pages 270-289, July.
    18. Morin, Roger A & Fernandez Suarez, Antonio, 1983. " Risk Aversion Revisited," Journal of Finance, American Finance Association, vol. 38(4), pages 1201-1216, September.
    19. Guiso, Luigi & Jappelli, Tullio & Pistaferri, Luigi, 2002. "An Empirical Analysis of Earnings and Employment Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 241-253, April.
    20. Kapteyn, A. & Teppa, F., 2002. "Subjective Measures of Risk Aversion and Portfolio Choice," Discussion Paper 2002-11, Tilburg University, Center for Economic Research.
    21. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, vol. 30(2), pages 585-603, May.
    22. Carol C. Bertaut & Martha Starr-McCluer, 2000. "Household portfolios in the United States," Finance and Economics Discussion Series 2000-26, Board of Governors of the Federal Reserve System (U.S.).
    23. Kapteyn, A. & Teppa, F., 2002. "Subjective Measures of Risk Aversion and Portfolio Choice," Discussion Paper 2002-11, Tilburg University, Center for Economic Research.
    24. Alessie, R.J.M. & Hochgürtel, S. & van Soest, A.H.O., 2000. "Household Portfolios in the Netherlands," Discussion Paper 2000-55, Tilburg University, Center for Economic Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Raman Uppal & Harjoat Bhamra, 2016. "Do Individual Behavioral Biases Affect Financial Markets and the Macroeconomy?," 2016 Meeting Papers 1358, Society for Economic Dynamics.
    2. Andrew C. Worthington, 2009. "Household Asset Portfolio Diversification: Evidence from the Household, Income and Labour Dynamics in Australia (HILDA) Survey," Discussion Papers in Finance finance:200908, Griffith University, Department of Accounting, Finance and Economics.

    More about this item

    Keywords

    household finances; asset portfolio; diversification; risk aversion;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwfin:diwfin6.1a. 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: (Bibliothek). General contact details of provider: http://edirc.repec.org/data/diwbede.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.