Why does junior put all his eggs in one basket? A potential rational explanation for holding concentrated portfolios |
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Authors: | Hervé Roche Stathis Tompaidis Chunyu Yang |
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Institution: | 1. Universidad Adolfo Ibáñez Business School, Chile;2. McCombs School of Business, University of Texas at Austin, United States;3. BI Norwegian Business School, Norway |
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Abstract: | Empirical studies of household portfolios show that young households, with little financial wealth, hold underdiversified portfolios that are concentrated in a small number of assets, a fact often attributed to behavioral biases. We present a potential rational alternative: we show that investors with little financial wealth, who receive labor income, rationally limit the number of assets they invest in when faced with financial constraints such as margin requirements and restrictions on borrowing. We provide theoretical and numerical support for our results and identify the ratio of financial wealth to labor income as a useful control variable for household portfolio studies. |
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Keywords: | D81 D83 E21 G11 |
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