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Do Wealth Fluctuations Generate Time-varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation

  • Markus K. Brunnermeier
  • Stefan Nagel

We use data from the PSID to investigate how households' portfolio allocations change in response to wealth fluctuations. Persistent habits, consumption commitments, and subsistence levels can generate time-varying risk aversion with the consequence that when the level of liquid wealth changes, the proportion a household invests in risky assets should also change in the same direction. In contrast, our analysis shows that the share of liquid assets that households invest in risky assets is not affected by wealth changes. Instead, one of the major drivers of households' portfolio allocation seems to be inertia: households rebalance only very slowly following inflows and outflows or capital gains and losses.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12809.

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Date of creation: Dec 2006
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Publication status: published as Brunnermeier, Markus K. and Stefan Nagel. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals." American Economic Review 98, 3 (2008): 713-736.
Handle: RePEc:nbr:nberwo:12809
Note: AP EFG
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