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Income Volatility and Portfolio Choices

Author

Listed:
  • Yongsung Chang

  • Jay. H. Hong

  • Marios Karabarbounis

  • Yicheng Wang

Abstract

Based on administrative data from Statistics Norway, we find economically significant shifts in households' financial portfolios around structural breaks in income volatility. When the standard deviation of labor-income growth doubles, the share of risky assets decreases by 4 percentage points. We ask whether this estimated marginal effect is consistent with a standard model of portfolio choice with idiosyncratic volatility shocks. The standard model generates a much more aggressive portfolio response than we see in the data. We show that Bayesian learning about the underlying volatility regime can reconcile the gap between the model and the data.

Suggested Citation

  • Yongsung Chang & Jay. H. Hong & Marios Karabarbounis & Yicheng Wang, 2020. "Income Volatility and Portfolio Choices," Working Paper Series no131, Institute of Economic Research, Seoul National University.
    • Handle: RePEc:snu:ioerwp:no131
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    Cited by:

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    2. Felici, Marco & Fuerst, Franz, 2023. "The heterogeneous relationship of owner-occupied and investment property with household portfolio choice," Journal of Housing Economics, Elsevier, vol. 62(C).
    3. Marios Karabarbounis, 2020. "A Life-Cycle Model with Individual Volatility Dynamics," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 4, pages 159-171.
    4. Sylvain Catherine & Paolo Sodini & Yapei Zhang, 2024. "Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden," Journal of Finance, American Finance Association, vol. 79(3), pages 1755-1788, June.
    5. Xiaoli, Gan & xiaoyi, Zhang & Xiaoyang, Ma & Khalid, Fahad, 2023. "Impact of financial environment on household risk financial asset selection: A micro perspective," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 137-145.
    6. Park, Jin Seok & Suh, Donghyun, 2019. "Uncertainty and household portfolio choice : Evidence from South Korea," Economics Letters, Elsevier, vol. 180(C), pages 21-24.
    7. Guo, Wei, 2024. "Income volatility and household commercial insurance allocation," Finance Research Letters, Elsevier, vol. 66(C).
    8. Huang, Bin & Wang, Bin & Chen, Zixuan, 2024. "Individual investment adaptations to COVID-19 lockdowns," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    9. Zhang, Dongyang, 2024. "From ban to balance: How agricultural climate policies reshape rural asset allocation?," Journal of International Money and Finance, Elsevier, vol. 149(C).

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    Keywords

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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G1 - Financial Economics - - General Financial Markets
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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