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Portfolio Allocation, Income Uncertainty and Households' Flight from Risk


  • Brown, Sarah

    () (University of Sheffield)

  • Gray, Daniel

    () (University of Sheffield)

  • Harris, Mark N.

    () (Curtin University)

  • Spencer, Christopher

    () (Loughborough University)


Analysing the US Panel Study of Income Dynamics, we present a new empirical method to investigate the extent to which households reduce their financial risk exposure when confronted with background risk. Our novel modelling approach – termed a deflated fractional ordered probit model – quantifies how the overall asset composition in a portfolio adjusts with background risk, and is unique in recovering for, any given risky asset class, the shares that are reallocated to a safer asset category. Background risk exerts a significant impact on household portfolios, resulting in a 'flight from risk', away from riskier to safe assets.

Suggested Citation

  • Brown, Sarah & Gray, Daniel & Harris, Mark N. & Spencer, Christopher, 2016. "Portfolio Allocation, Income Uncertainty and Households' Flight from Risk," IZA Discussion Papers 10408, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp10408

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    More about this item


    asset allocation; background risk; flight from risk; fractional models;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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