Download or read book Wealth Shocks and Risk Aversion written by Ricardo M. Sousa and published by . This book was released on 2009 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modern literature departs from time-separable constant relative risk aversion preferences to explain asset pricing facts. This deviation typically implies that wealth shocks generate transitory variations in agents' relative risk aversion and, possibly, portfolio re-allocations over time.I empirically analyze this relationship using U.S. macroeconomic data and find evidence for time-variation in portfolio shares that is consistent with counter-cyclical risk aversion. These results suggest, therefore, that wealth-dependent, habit-formation or loss and disappointment aversion utility functions are a good description of preferences.Controlling for observed versus expected asset returns, I also show that: (i) wealth effects are significant (although temporary) and there is no evidence of inertia contrary to Brunnermeier and Nagel (2006); and (ii) the consumption-wealth ratio (Lettau and Ludvigson, 2001), the labor income risk (Julliard, 2004) and the labor income-consumption ratio (Santos and Veronesi, 2006) partially explain changes in the risky asset share.

Download or read book Risk Aversion and Wealth Evidence from Person to Person Lending Portfolios written by and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Do Wealth Fluctuations Generate Time Varying Risk Aversion Micro Evidence on Individuals Asset Allocation written by Markus K. Brunnermeier and published by . This book was released on 2015 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent asset pricing models depart from the standard time-separable CRRA preferences - by introducing additive habit formation, for example - so that wealth shocks produce transitory variation in agents' relative risk aversion. We investigate whether there is micro-level evidence in support of this proposed (negative) relationship between wealth shocks and relative risk aversion. To this end, we analyze two decades of panel data on household asset allocation from the PSID and CEX surveys. Using a variety of specifications, we find that the share of financial assets that households invest in risky assets is unaffected by shocks to their wealth. We also find that following in- and outflows of financial wealth, and, in particular, capital gains and losses, households rebalance only very little. But even controlling for this inertia, wealth shocks do not have economically significant effects on household asset allocation. Our results suggest that wealth fluctuations do not generate time-varying risk aversion.

Download or read book Wealth Shock and Impact of Health on Risk Aversion and Savings written by Vrinda Gupta and published by . This book was released on 2010 with total page 15 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the bear market of 1999-02 many investors lost large proportions of their life-time savings invested in equity. Indeed, total returns on the FTSE All Share index declined by 37 per cent by the end of year 2002, while the Samp;P 500 declined by 38 per cent. The impact was magnified by falling bond yields in both Europe and North America. The decline in bond yields meant older individuals were faced with lower annuity rates for their pensions and lower returns on similar safe instruments such as fixed-term bonds. This paper models the relationship between risk aversion, status of health and changes in savings among older individuals in the UK. Using responses to a unique questionnaire, we show how these factors are correlated with the decline in total savings after the markets crashed in 2000.

Download or read book The Economic Consequences of Health Shocks written by Adam Wagstaff and published by World Bank Publications. This book was released on 2005 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: "While there is a great deal of anecdotal evidence on the economic effects of adverse health shocks, there is relatively little hard empirical evidence. The author builds on recent empirical work to explore in the context of postreform Vietnam two related issues: (1) how far household income and medical care spending responds to health shocks, and (2) how far household consumption is protected against health shocks. The results suggest that adverse health shocks - captured by negative changes in body mass index (BMI) - are associated with reductions in earned income. This appears to be only partly - if at all - due to a reverse feedback from income changes to BMI changes. By contrast, there is a hint - the relevant coefficient is not significant - that adverse BMI shocks may result in increases in unearned income. This may reflect additional gifts, remittances, and so on, from family and friends following the health shock. Medical spending is found to increase following an adverse health shock, but not among those with health insurance. The impact for the uninsured is large, equal in absolute size to the income loss associated with a BMI shock. The lack of impact for the insured points to complete insurance against the medical care costs associated with health shocks, and is consistent with the very generous coverage of Vietnam's health insurance program in this period. The question arises: have Vietnamese households been able to hold their food and nonfood consumption constant in the face of these income reductions and extra medical care outlays? The results suggest not. For the sample as a whole, both food and nonfood consumption are found to be responsive to health shocks, indicating an inability to smooth nonmedical consumption in the face of health shocks. Further analysis reveals some interesting differences across different groups within the sample. Households with insurance come no closer to smoothing nonmedical consumption than uninsured households. Furthermore, and somewhat counterintuitively, better-off households - including insured households - fare worse than poorer households in smoothing their nonmedical consumption in the face of health shocks, despite the fact that in the case of insured households there are no medical bills associated with an adverse health event. Why the poor rely on dissaving and borrowing to such an extent, and do not apparently reduce their food and nonfood consumption following an adverse health shock while the better-off do, may be because the levels of food and nonfood consumption of the poor are simply too low relative to basic needs to enable them to cut back in the face of an adverse BMI shock."--World Bank web site.

Download or read book Relative Risk Aversion and the Transmission of Financial Crises written by Melisso Boschi and published by . This book was released on 2008 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study how investor behaviour affects the transmission of financial crises. If investors exhibit decreasing relative risk aversion, then negative wealth shocks increase the risk premium required to hold risky assets. We integrate this into a second generation model of currency crises which allows for a competitiveness effect and for contagion through changes in fundamentals. The investor behaviour can lead to the transmission of financial crises even in the absence of the competitiveness effect, and makes multiple equilibria more likely. The possible stabilization effects of capital controls and a Tobin tax on the international transmission of financial crises are also studied.

Download or read book Wealth Shock and Stock Market Anomalies written by Samuel Xin Liang and published by . This book was released on 2020 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate how disposal non-financial wealth and its changes ndash; wealth shocks create exogenous demands and demands shocks for financial assets and demands a systematic pricing premium for risky assets. This premium lowers Lucas (1978)'s implied risk aversion. Responses of financial assets to these exogenous demands and their shocks are non-linearly related to a stock's growth, size, and momentum in the equilibrium. These exogenous demand shocks lead to theoretical explanation for the endogenous pricing of value, size, momentum, market liquidity risk and market illiquidity, the SEO puzzle and the negative predictability of aggregated new issues. Heterogeneous disposal non-financial wealth across countries explain the pricing of market liquidity risk across market portfolios.

Download or read book Essays on Firm Health Risk Aversion and Wealth Distribution written by Hoi Pan Wong and published by . This book was released on 2019 with total page 83 pages. Available in PDF, EPUB and Kindle. Book excerpt: Studies show that historically wealth distribution has again become very concentrated in the US since the end of the 1970s (Wolff 1996, 2010). Both the heavy concentration and the rapid increase in top wealth share in the US are well documented by Wolff (2006). In the US, the wealthiest 5 percent of American households held 54 percent of all wealth reported in the 1989 Survey of Consumer Finance; this share has reached 63 percent as of 2013 (Yellen, 2014).In the second chapter I study how firm heterogeneity affects wealth distribution through entrepreneurial income and capital gains. As shown in Hottman, Redding and Weinstein 2016, size distribution of firms is highly skewed. Top 1% of firms in a product group on average have market shares of 50%. I develop a dynamic general equilibrium model with heterogeneous households and multiproduct firms. Each product has its own rate of return and scale, which result in heterogeneity in the rate of return and size of firms. Firms with larger scope of products benefit more from stricter control in product quality and thus grow faster than the others do. Households need to pay a premium to firm owners to invest in their firm, which can be interpreted as capital gain. Wealth of households, especially entrepreneurs, accumulates partly because of entrepreneurial income, which is their claim on their firm's profits, and partly because they receive capital gain. Firms in the model have two dimensions: its rate of return and the firm size. The premium increases in both, which allows households to sort into different firms based on their wealth.The distribution of product space is calibrated with Nielsen barcode dataset. The simulation shows that the firm heterogeneity in its two dimensions results in a severe wealth inequality. The model can explain 90% of the rise in top wealth concentration between 2003 and 2012 in the United States. The result is consistent with findings in Saez and Zucman 2016 that the upswing in the top 1% wealth share is due to the rise in the top 0.1% and that the increase in wealth inequality is not due to rate of return differential on corporate stocks. Counterfactual exercises highlight entrepreneurship as the main driver in wealth equality and show that fluctuations in risk free rate of return and access to new investment opportunities reduce wealth inequality, of which each may offset up to half of the effect of entrepreneurship.The third chapter studies how households' cumulative health shocks affect their health investment, health insurance premium, and wealth. I develop a rich lifecycle model of endogenous health capital, insurance premium and wealth, with a diffusion income process and Poisson health shocks. In this model, health shocks affect a household's wealth through three channels. It increases medical spending, lowers productivity and thus income, and increases the probability of death. Theoretical results show that since health increases life expectancy, it becomes a luxury good relative to consumption. When income rises, health generates larger marginal utility relative to consumption. As a result, rich people invest more in health, live longer, and save more. This implies that vital health shocks may facilitate top concentration in wealth distribution. With the CDC data for the top nine death-causing diseases I estimate vital disease processes and calibrate the model. The counterfactual exercise shows that effects of vital health shocks indeed help explain wealth inequality.The fourth chapter is a complement to the second chapter Firm Heterogeneity and Wealth Distribution where households are risk-neutral due to linear utility. In this chapter I study effects of difference in households' attitudes to risk on wealth distribution by introducing heterogeneity on the risk aversion parameter of the utility function. A two-period model reveals that risk aversion heterogeneity exacerbates wealth inequality. Households with relatively low level of risk aversion or high level of wealth are more exposed to risk. The more risk-averse, the less risky the optimal project and, under some condition, the less the agent may invest. The wealthier, the larger the investment. As risks in investment opportunities are realized, the variance of income among relatively wealthy households are larger than its counterpart among poor households, which leads to a heavier top concentration in wealth distribution. Lucky wealthy risk lovers tend to move to the top while unlucky investors go to the bottom of the wealth distribution.

Download or read book Implications of Labor Market Frictions for Risk Aversion Ann Risk Premia written by Eric T. Swanson and published by . This book was released on 2019 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: A flexible labor margin allows households to absorb shocks to asset values with changes in hours worked as well as changes in consumption. This ability to partially offset wealth shocks by varying hours of work can significantly alter the household’s attitudes toward risk, as shown in Swanson (2012). In this paper, I analyze how frictional labor markets affect that analysis. Household risk aversion (as measured by willingness to pay to avoid a wealth shock) is higher: 1) in countries with more frictional labor markets, 2) in recessions, and 3) for households that have more difficulty finding a job. These predictions are consistent with empirical evidence from a variety of sources. Quantitatively, I show that labor market frictions in Europe are large enough to play a substantial contributing role to risk aversion in those countries. Nevertheless, labor markets in the U.S. and Europe are sufficiently flexible that risk aversion is much closer to the frictionless benchmark in Swanson (2012) than to traditional measures that assume labor is fixed.

Download or read book Risk Aversion and Wealth Effects on Portfolios with Many Assets written by David Cass and published by . This book was released on 1973 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Implications of Labor Market Frictions for Risk Aversion and Risk Premia written by Eric T. Swanson and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: A flexible labor margin allows households to absorb shocks to asset values with changes in hours worked as well as changes in consumption. This ability to partially offset wealth shocks by varying hours of work can significantly alter the household's attitudes toward risk, as shown in Swanson (2012). In this paper, I analyze how frictional labor markets affect that analysis. Household risk aversion (as measured by willingness to pay to avoid a wealth shock) is higher: 1) in countries with more frictional labor markets, 2) in recessions, and 3) for households that have more difficulty finding a job. These predictions are consistent with empirical evidence from a variety of sources. Quantitatively, I show that labor market frictions in Europe are large enough to play a substantial contributing role to risk aversion in those countries. Nevertheless, labor markets in the U.S. and Europe are sufficiently flexible that risk aversion is much closer to the frictionless benchmark in Swanson (2012) than to traditional measures that assume labor is fixed.

Download or read book Impatience Risk Aversion and the Optimal Relationship Between Consumption and Wealth written by H. Molana and published by . This book was released on 1990 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion written by Matthew Rabin and published by . This book was released on 2000 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Risk Profiling and Tolerance Insights for the Private Wealth Manager written by Joachim Klement and published by CFA Institute Research Foundation. This book was released on 2018-05-01 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt: If risk aversion and willingness to take on risk are driven by emotions and we as humans are bad at correctly identifying them, the finance profession has a serious challenge at hand—how to reliably identify the individual risk profile of a retail investor or high-net-worth individual. In this series of CFA Institute Research Foundation briefs, we have asked academics and practitioners to summarize the current state of knowledge about risk profiling in different key areas.

Download or read book Twin Picks Disentangling the Determinants of Risk taking in Household Portfolios written by Groupe HEC (Jouy-en-Josas, Yvelines). Direction de la recherche and published by . This book was released on 2011 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the determinants of financial risk-taking in a panel containing the asset holdings of Swedish twins. We measure the impact of a broad set of demographic, financial, and portfolio characteristics, and use yearly twin pair fixed effects to control for genes and shared background. We report a strong positive relation between risky asset market participation and financial wealth. Among participants, the average financial wealth elasticity of the risky share is significantly positive and estimated at 22%, which suggests that the average individual investor has decreasing relative risk aversion. Furthermore, the financial wealth elasticity of the risky share itself is heterogeneous across investors and varies strongly with characteristics. The elasticity decreases with financial wealth and human capital, and increases with habit, real estate wealth and household size. As a consequence, the elasticity of the aggregate demand for risky assets to exogenous wealth shocks is close to, but does not coincide with, the elasticity of a representative investor with constant relative risk aversion. We confirm the robustness of our results by running time-differenced instrumental variable regressions, and by controlling for zygosity, lifestyle, mental and physical health, the intensity of communication between twins, and measures of social interactions.

Download or read book Does Relative Risk Aversion Vary with Wealth Evidence from Households Portfolio Choice Data written by Xuan Liu and published by . This book was released on 2016 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: We test whether relative risk aversion varies with wealth using the Panel Study of Income Dynamics data in the U.S. Our analytical results indicate the following implications. For each household, there are two channels through which the risky share responds to wealth fluctuations, the income channel and the habit channel. For across households, there are heterogeneous responses through both the habit channel and the income channel. Finally, two potential misspecification problems on time-varying relative risk aversion arise when both heterogeneous responses through the habit channel and the responses through the income channel are ignored. Our main empirical findings are to show the importance of the income channel and the heterogeneous responses, and to provide strong evidence of relative risk aversion varying with wealth, after correcting two misspecification problems.

Download or read book Risk Aversion Intertemporal Substitution and Consumption written by Frederick van der Ploeg and published by . This book was released on 1990 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: