Household portfolio allocation, uncertainty, and risk

TitleHousehold portfolio allocation, uncertainty, and risk
Publication TypeJournal Article
Year of Publication2021
AuthorsBrown, S, Gray, D, Harris, MN, Spencer, C
JournalJournal of Empirical Finance
ISBN Number0927-5398
KeywordsApplied econometrics, asset allocation, Background risk, Fractional models

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

Citation Key11665