Income Risk and Portfolio Choice: An Empirical Study |
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| Authors: | XIAOHONG ANGERER POK‐SANG LAM |
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| Institution: | 1. Angerer is with the Center for Human Resource Research, Ohio State University;2. Lam is with the Department of Economics, Ohio State University. The authors are deeply grateful to Campbell R. Harvey, Patricia Reagan, Rene Stulz, an anonymous referee, and the Editor (Robert F. Stambaugh), whose comments and suggestions greatly strengthened the paper. The authors thank Xiaoqiang Cheng, Paul Evans, Virginia Goettl, Donald Haurin, Andrew Karolyi, Amanda McClain, Ross Miller, Randall J. Olsen, and Chana Ulm for their helpful comments, and Rosella Gardecki, Traci Mach, Steve McClaskie, Karima Nagi, and Jay Zagorsky for their valuable assistance in processing the data. The authors also acknowledge the excellent research assistance of Vipul Bhatt and the financial assistance provided by Department of Economics, Ohio State University. The paper has benefited from presentation at the 2006 Summer Econometric Society North America Meeting at Minneapolis, the 2007 Chinese Economists Society Meeting at Changsha, China, and the Institute of Economics, Academia Sinica, Taiwan. Any errors are our own. |
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| Abstract: | This paper investigates the relationship between portfolio choice and labor income risk in the National Longitudinal Survey of Youth 1979 Cohort. Permanent income risk (variability of shocks to income that have permanent effect) significantly reduces the share of risky assets in the household's portfolio, while transitory income risk (variability of shocks with no lasting effect) does not. This result provides strong evidence that households' portfolio choices respond to labor income risks in a manner consistent with economic theory. |
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