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Does health affect portfolio choice?

  • Paul A. Smith
  • David A. Love

Previous studies find a strong and positive empirical connection between health status and the share of risky assets held in household portfolios. But is this relationship truly causal, in the sense that households respond to changes in health by altering their portfolio allocation, or does it simply reflect unobserved differences across households? We find that most of the variation by health is on the extensive margin of stock ownership (rather than the marginal allocation conditional on ownership), which more plausibly points to non-causal explanations. Moreover, we find that any link between health and risky assets depends crucially on the econometric treatment of unobserved heterogeneity. Once we account adequately for unobserved household differences, there is no longer a statistically significant relationship between any of our health measures and household portfolio decisions.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-45.

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Date of creation: 2007
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Handle: RePEc:fip:fedgfe:2007-45
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