Entrepreneurship and household portfolio choice: Evidence from the China Household Finance Survey

The efficient allocation of household assets is important for household wealth and entrepreneurial activities. However, there is scarce evidence on how entrepreneurial activities influence household financial decisions. We use a simple model to characterize the impact of entrepreneurship on household portfolio choice and the two underlying channels—the diversification effect and the risk substitution effect. We also empirically examine the impact of entrepreneurship using data from the 2013, 2015, and 2017 waves of the China Household Finance Survey (CHFS). The empirical results show that entrepreneurship significantly decreases both household risky market participation and risky asset holding. These findings are robust to alternative measurements of key variables, different model specifications, and Lewbel’s two-stage estimators. This study also verifies the co-existence of both the diversification and risk substitution effects. In particular, the net effect of entrepreneurship on household portfolio choice varies between urban and rural areas due to the different offsetting results between the two effects.     

Long‐Run Stockholder Consumption Risk and Asset Returns

We provide new evidence on the success of long‐run risks in asset pricing by focusing on the risks borne by stockholders. Exploiting microlevel household consumption data, we show that long‐run stockholder consumption risk better captures cross‐sectional variation in average asset returns than aggregate or nonstockholder consumption risk, and implies more plausible risk aversion estimates. We find that risk aversion around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French portfolios, the market portfolio, bond portfolios, and the entire cross‐section of stocks.     

投资者亲社会偏好与风险投资

本文使用2012年和2014年中国家庭追踪调查(CFPS)数据,实证分析了户主的亲社会偏好对其家庭风险投资行为的影响。研究发现,户主的亲社会偏好对其家庭风险投资存在显著的正向影响,即亲社会偏好会促使家庭进行风险投资。在考虑了可能存在的内生性问题之后,这一结果仍然稳健。进一步地,分组回归后发现,在非农户口群体、使用互联网群体和偏好风险群体中,户主的亲社会偏好对其家庭风险投资的影响更加显著。本文的政策含义在于,在制定涉及家庭金融投资的相关政策时应充分考虑亲社会偏好对政策效果的影响。     

Dynamic portfolio choice with deferred annuities

We derive the optimal life-cycle portfolio choice and consumption pattern for households facing uncertain labor income, risky capital market, and mortality risk. In addition to stocks and bonds, the households have access to deferred annuities. Deferred payout life annuities are financial contracts providing life-long income to the annuitant after a specified period of time conditional on survival. We find that deferred annuities play an important role in household portfolios and generate significant welfare gains. Households with high benefits from state pensions, moderate risk aversion and moderate labor income risk purchase deferred annuities from age 40 and gradually increase their portfolio share. At retirement, deferred annuities account for 78% of total financial wealth. Households with low state pensions and high labor income risk purchase more annuities and earlier. Uncertainty with respect to future mortality rates has the same effect, i.e. household hedge against longevity risks using deferred annuities.     

What drives portfolio investments of German banks in emerging capital markets?

After decades of steady liberalization and financial market development, emerging capital markets experienced unparalleled capital inflows in the aftermath of the emerging markets crisis of the 1990s. This paper studies portfolio investment decisions of German banks in emerging capital markets from 2002 to 2007. The use of a dynamic time-series cross-section framework and the micro database External Position Report provided by Deutsche Bundesbank permit insights into the various determinants of portfolio investments in ECMs. For example, there is evidence that German banks take into account the various dimensions of financial market development in their portfolio investment decisions and anticipate the special risks inherent in emerging markets. Proxies for the overall development and efficiency of capital markets have the highest economic significance of all variables. The introduction of depositary receipts programs has a positive impact on stock market investment. Moreover, there is evidence that global risk aversion exerts a significant influence in times of financial turmoil.     

Comparative statics and portfolio choices under the phantom decision model

This study characterizes attitudes toward uncertainty in the phantom decision model introduced by Izhakian and Izhakian (2015) and conducts a comparative statics analysis to examine how changes in phantom uncertainty and phantom aversion affect portfolio choices. First, “phantom averse” and “more phantom-averse” are defined in a manner that differs from Izhakian and Izhakian (2015). Assuming that utility functions have realization forms, the above notions are characterized by the shapes of their reduction components. For the portfolio choice problem that consists of one safe asset and one phantom asset, we derive sufficient conditions under which changes in phantom uncertainty and phantom aversion monotonically decrease the investment in the phantom asset. Some familiar concepts in expected utility theory are extended to the framework of the phantom decision model.     

Variable Selection for Portfolio Choice

We study asset allocation when the conditional moments of returns are partly predictable. Rather than first model the return distribution and subsequently characterize the portfolio choice, we determine directly the dependence of the optimal portfolio weights on the predictive variables. We combine the predictors into a single index that best captures time variations in investment opportunities. This index helps investors determine which economic variables they should track and, more importantly, in what combination. We consider investors with both expected utility (mean variance and CRRA) and nonexpected utility (ambiguity aversion and prospect theory) objectives and characterize their market timing, horizon effects, and hedging demands.     

Portfolio choice with indivisible and illiquid housing assets: the case of Spain

This paper studies the investment decisions of Spanish households using a unique data-set, the Spanish Survey of Household Finance (EFF). We propose a theoretical model in which households, given a fixed investment in housing, allocate their net wealth across bank time deposits, stocks and mortgage. Besides considering housing as an indivisible and illiquid asset that restricts the portfolio choice decision, we take into account the financial constraints that households face when they apply for external funding. For every representative household in the EFF, we solve this theoretical problem and obtain the theoretically optimal portfolio that is then compared with households’ actual choices. We find that households significantly under-invest in stocks and deposits while the optimal and actual mortgage investments agree. Considering the three types of financial assets at once, we find that the households headed by highly financially sophisticated, older, retired, richer, and unconstrained persons are the ones investing more efficiently.     

The Valuation of Multivariate Contingent Claims in Discrete Time Models

There are several examples in the literature of contingent claims whose payoffs depend on the outcomes of two or more stochastic variables. Familiar cases of such claims include options on a portfolio of options, options whose exercise price is stochastic, and options to exchange one asset for another. This paper derives risk neutral valuation relationships (RNVRs) in a discrete time setting that facilitate the pricing of such complex contingent claims in two specific cases: joint lognormally distributed underlying variables and constant proportional risk aversion on the part of investors, and joint normally distributed underlying variables and constant absolute risk aversion preferences, respectively. This methodology is then applied to the valuation of several interesting complex contingent claims such as multiperiod bonds, multicurrency option bonds, and investment options.     

Estimating Portfolio and Consumption Choice: A Conditional Euler Equations Approach

This paper develops a nonparametric approach to examine how portfolio and consumption choice depends on variables that forecast time-varying investment opportunities. I estimate single-period and multiperiod portfolio and consumption rules of an investor with constant relative risk aversion and a one-month to 20-year horizon. The investor allocates wealth to the NYSE index and a 30-day Treasury bill. I find that the portfolio choice varies significantly with the dividend yield, default premium, term premium, and lagged excess return. Furthermore, the optimal decisions depend on the investor's horizon and rebalancing frequency.     

Dynamic portfolio optimization with liquidity cost and market impact: a simulation-and-regression approach

We present a simulation-and-regression method for solving dynamic portfolio optimization problems in the presence of general transaction costs, liquidity costs and market impact. This method extends the classical least squares Monte Carlo algorithm to incorporate switching costs, corresponding to transaction costs and transient liquidity costs, as well as multiple endogenous state variables, namely the portfolio value and the asset prices subject to permanent market impact. To handle endogenous state variables, we adapt a control randomization approach to portfolio optimization problems and further improve the numerical accuracy of this technique for the case of discrete controls. We validate our modified numerical method by solving a realistic cash-and-stock portfolio with a power-law liquidity model. We identify the certainty equivalent losses associated with ignoring liquidity effects, and illustrate how our dynamic optimization method protects the investor's capital under illiquid market conditions. Lastly, we analyze, under different liquidity conditions, the sensitivities of certainty equivalent returns and optimal allocations with respect to trading volume, stock price volatility, initial investment amount, risk aversion level and investment horizon.     

Portfolio choice with skewness preference and wealth-dependent risk aversion

This paper studies a dynamic portfolio choice problem for an investor with both wealth-dependent risk aversion and wealth-dependent skewness preferences. In a general economic setting, the solution is characterized in terms of a system of extended Hamilton-Jacobi-Bellman (EHJB) equations and the solution is given in closed form in some special cases. We demonstrate the effects of higher order risk preferences and state-dependent risk aversion on the optimal asset allocation decisions. We find that wealth-dependent risk aversion facilitates risk taking and the skewness preference leads to a more positively skewed portfolio in certain circumstances.     

Optimal growth portfolios reconciling theory and practice

Modern portfolio theory dictates diversification among assets that are not perfectly correlated (that is, asset diversification). Professional investors, on the other hand, contend that one can simply diversify across time (that is, time diversification). The controversy of time diversification versus asset diversification is examined in this article by empirically analyzing the optimum investment strategies for a myopic utility function (the extreme case that supports across asset diversification) under varying degrees of relative risk aversion. While Merton and Samuelson (1974) and Samuelson (1990) show that with a myopic utility function the investment diversification strategy does not change with an increase in the investment horizon, the recommendation of professional investors is also found to hold since for a wide range of relative risk-aversion measures, the optimum portfolio is shown to consist almost entirely of equities.     

Dynamic portfolio choice without cash

We consider the dynamic mean–variance portfolio choice without cash under a game theoretic framework. The mean–variance criterion is investigated in the situation where an investor allocates the wealth among risky assets while keeping no cash in a bank account. The problem is solved explicitly up to solutions of ordinary differential equations by applying the extended Hamilton–Jacobi–Bellman equation system. Given a constant risk aversion coefficient, the optimal allocation without a risk-free asset depends linearly on the current wealth, while that with a risk-free asset turns out to be independent of the current wealth. We also study the minimum-variance criterion, which can be viewed as an extension of the mean–variance model when the risk aversion coefficient tends to infinity. Calibration exercises demonstrate that for large investments, the mean–variance model without cash yields the highest certainty equivalent return for both short-term and long-term investments. Furthermore, the mean–variance portfolio choices with and without cash yield almost the same Sharpe ratio for an investment with large initial wealth.     

Does religiosity influence venture capital investment decisions?

Theories on contextual behavior (e.g., social norm, self-identity, and legitimacy theories) suggest that the religiosity of the geographical area in which an organization operates influences its behavior. Using a sample of 91,020 VC investments in the U.S., we study whether religiosity influences VC investment decisions. Based on prior literature that finds a positive relation between religiosity and risk aversion, we posit that VCs located in more religious counties make less risky investments. We find that VCs located in more religious areas are more likely to be involved in staging and syndication and have a greater propensity to invest in later and expansion stages of portfolio companies. Taken together, our results suggest that VCs located in religious counties tend to be more risk averse.     

Dynamic Asset Allocation under Inflation

We develop a simple framework for analyzing a finite-horizon investor's asset allocation problem under inflation when only nominal assets are available. The investor's optimal investment strategy and indirect utility are given in simple closed form. Hedge demands depend on the investor's horizon and risk aversion and on the maturities of the bonds included in the portfolio. When short positions are precluded, the optimal strategy consists of investments in cash, equity, and a single nominal bond with optimally chosen maturity. Both the optimal stock–bond mix and the optimal bond maturity depend on the investor's horizon and risk aversion.     

The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime

The study investigates how monetary policy affects bank risk-taking under a multiple-tool regime of Vietnam during 2007–2018. Particularly, we also consider the conditioning role of bank performance, broken down by bank profitability and cost efficiency, in this nexus. Using both dynamic and static panel models, we show that the liquidity injection initiated by the central bank’s asset purchases induces banks to take more risks, captured by the traditional Z-score and two alternative measures of credit risk. However, monetary policy easing through decreased interest rates is beneficial to the credit portfolio and financial stability of banks, which therefore challenges the functioning of the bank risk-taking channel. This startling result is robust across three different interest rate measures, including lending rates, refinance rates and rediscount rates. Further analysis reveals that our observed effects are alleviated for banks with higher performance — i.e., more profitable and efficient banks. This in-depth finding offers more insights into the “search for yield” incentive, based on the theory of information asymmetry and the two competing hypotheses of “bad management” and “cost skimping”.     

Time-consistency in managing a commodity portfolio: A dynamic risk measure approach

We address the problem of managing a storable commodity portfolio, that includes physical assets and positions in spot and forward markets. The vast amount of capital involved in the acquisition of a power plant or storage facility implies that the financing period stretches over a period of several quarters or years. Hence, an intertemporally consistent way of optimizing the portfolio over the planning horizon is required. We demonstrate the temporal inconsistency of static risk objectives based on final wealth and advocate the validity in our setting of a new class of recursive risk measures introduced by Epstein and Zin [Epstein, G., Zin, S., 1989. Substitution, risk aversion, and the temporal behavior of consumption and asset returns: A theoretical framework. Econometrica, 57 (4) 937–969] and Wang [Wang, T., 2000. A class of dynamic risk measures University of British Columbia]. These risk measures provide important insights on the trade-offs between date-specific risks (i.e., losses occurring at a point in time) and time-duration risks represented by the pair (return, risk) over a planning horizon; in a number of situations, they dramatically improve the efficiency of static risk objectives, as exhibited in numerical examples.     

Optimal holding period for assets that must be liquidated: A certainty equivalent wealth approach

Consumers often invest with a specific goal in mind and often know with some precision when the investment proceeds will be needed to achieve that goal. Because different investors have different attitudes toward risk and because different asset types exhibit different risk characteristics, there is often confusion as to the appropriate investment asset for a particular investor with a known investment horizon. It is also frequently, unclear as to whether investments should be switched to a less risky asset as time to liquidation becomes short. This paper addresses the issues of initial asset choice and the advisability of switching among assets when the investment goal date is known, employing the methodology of certainty equivalent wealth. In addition to suggesting optimal investment strategies for individuals based upon holding period and degree of risk aversion, it shows that switching investment assets produces suboptimal results.     

Risk Aversion Revisited

In order to supply additional empirical evidence of the effect of wealth on relative risk aversion, this study investigates households' demand for risky assets, using analysis of covariance techniques applied to the asset holdings of Canadian individual households. The extent and pattern of life-cycle effects are also examined. Results generally point to decreasing relative risk aversion when housing is either excluded from the definition of wealth or treated as a riskless asset. The investor's life-cycle plays a prominent role in portfolio selection behavior, with risk aversion increasing uniformly with age. Tax differentials do not seem to be an important element in investment decisions with respect to risk. When the sample and wealth definitions are censored in order to approximate those of previous empirical studies, their findings on relative risk aversion are generally corroborated.