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Channels of risk-sharing at a micro level: savings, investments and the risk aversion heterogeneity

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  • Faruk Balli
  • F.M. Pericoli
  • E. 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.

Suggested Citation

  • Faruk Balli & F.M. Pericoli & E. Pierucci, 2015. "Channels of risk-sharing at a micro level: savings, investments and the risk aversion heterogeneity," CAMA Working Papers 2015-01, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2015-01
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    2. Pierfederico Asdrubali & Simone Tedeschi & Luigi Ventura, 2020. "Household risk‐sharing channels," Quantitative Economics, Econometric Society, vol. 11(3), pages 1109-1142, July.

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    More about this item

    Keywords

    Channels of risk-sharing; consumption smoothing; risk aversion heterogeneity;
    All these keywords.

    JEL classification:

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

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