Heterogeneous background risks and portfolio choice : Evidence from micro-level data

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)1687-1720
Journal / PublicationJournal of Money, Credit and Banking
Issue number8
Online published21 Nov 2014
Publication statusPublished - Dec 2014


We construct a set of household-level background risk variables to capture the covariance structure of three nonfinancial assets and two financial assets. These risks are in general statistically significant and economically important for a household's stock market participation and stockholdings. A one-standard-deviation increase in background risks reduces the participation probability by 11% and the stockholdings-to-wealth ratio by 4%. The volatilities of labor income, housing value, and business income reduce a household's participation and stockholdings. A household with labor income highly correlated with stock (bond) returns is less (more) likely to invest in stock.

Research Area(s)

  • Background risks, Portfolio choice, Stock market participation

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