Household portfolio allocation, uncertainty, and risk
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Brown, S. and Gray, D. and Harris, M.N. and Spencer, C. 2021. Household portfolio allocation, uncertainty, and risk. Journal of Empirical Finance. 63: pp. 96-117.
Journal of Empirical Finance
Faculty of Business and Law
School of Accounting, Economics and Finance
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.
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