Income volatility and portfolio choices

Based on administrative data from Statistics Norway, we find economically significant shifts in households’ financial portfolios around individual structural breaks in labor-income volatility. According to our estimates, when income risk doubles, households reduce their risky share of financial asse...

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Bibliographic Details
Published in:Review of economic dynamics 2022-04, Vol.44, p.65-90
Main Authors: Chang, Yongsung, Hong, Jay H., Karabarbounis, Marios, Wang, Yicheng, Zhang, Tao
Format: Article
Language:English
Subjects:
Income volatility
Portfolio choice
Risky share
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Summary:Based on administrative data from Statistics Norway, we find economically significant shifts in households’ financial portfolios around individual structural breaks in labor-income volatility. According to our estimates, when income risk doubles, households reduce their risky share of financial assets by 5 percentage points, thus tempering their overall risk exposure. We show that our estimated risky share response is consistent with a standard portfolio choice model augmented with idiosyncratic, time-varying income volatility.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2021.04.004