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Portfolio Allocation, Income Uncertainty and Households' Flight from Risk

Listed author(s):
  • 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.

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File URL: http://ftp.iza.org/dp10408.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 10408.

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Length: 42 pages
Date of creation: Dec 2016
Handle: RePEc:iza:izadps:dp10408
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