Labor income risk and households’ risky asset holdings (2016)
Author(s):
Gideon Becker (Faculty
of Economics and Social Sciences, University of Tübingen, Tübingen, Germany)
Thomas Dimpfl (Faculty
of Economics and Social Sciences, University of Tübingen, Tübingen, Germany)
Abstract:
Purpose
Financial theory suggests that with increasing labor income
risk, the reluctance of households to hold stocks increases. Therefore, this
paper aims to investigate the determinants of a household’s decision on whether
to invest in risky financial assets.
Design/methodology/approach
Income risk is measured as the observed variation of household
income over a five-year period. The authors use both the time and the
cross-sectional dimension of the German socio-economic panel to control for
unobserved heterogeneity.
Findings
The authors find that indeed higher variation, i.e. higher
income risk, reduces the propensity to invest in risky assets. However, when controlling
for household heterogeneity, as well as subjective measures of a household’s
financial situation (income satisfaction, worries about financial situation),
the impact of observed labor income variation vanishes. It is therefore
concluded that in particular the perception of investment risk and of the
riskiness of the environment determines the investment decision to a great
extent.
Originality/value
The paper contributes to a better understanding of a household’s
investment decision-making process. To the best of the authors’ knowledge, it
is the first to fully exploit the panel structure of the data to control for
unobserved heterogeneity which leads to novel conclusions with respect to the
effect of labor income.
Keywords:
Unobserved
heterogeneity, Household
finance, Behavioural
finance, Labour income
risk, Risky asset
market participation, D14, D81, G11
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