Income volatility and portfolio choices

Yongsung Chang; Jay H. Hong; Marios Karabarbounis; Yicheng Wang; Tao Zhang

doi:10.1016/j.red.2021.04.004

Income volatility and portfolio choices

Yongsung Chang, Jay H. Hong, Marios Karabarbounis, Yicheng Wang, Tao Zhang

Department of Economics

Research output: Contribution to journal › Article › peer-review

3 Citations (Scopus)

Abstract

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.

Original language	English
Pages (from-to)	65-90
Number of pages	26
Journal	Review of Economic Dynamics
Volume	44
DOIs	https://doi.org/10.1016/j.red.2021.04.004
Publication status	Published - 2022 Apr

Bibliographical note

Funding Information:
Any opinions expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System. For helpful comments, we thank our discussant José Mustre-del-Río, and also Mark Aguiar, Mark Bils, Marcus Hagedorn, Grey Gordon, Per Krusell, Ben Moll, Luigi Pistaferri, Kjetil Storesletten, Morten Ravn, Alex Wolman and other participants at U of Oslo, Econometric Society China Meeting 2018 in Shanghai, SED 2018, the 12th Nordic Summer Symposium in Macroeconomics, EEA/ESEM 2018 in Cologne, AEA 2019, Rochester, Yonsei, Seoul National U, Pittsburgh, Richmond Fed, SHUFE, Tsinghua PBC and ITAM. Jay Hong acknowledges financial support from Seoul National University (SNU ‘Overseas Training Expenses for Humanities & Social Sciences’). Yicheng Wang acknowledges financial support from the European Research Council ((FP7/2007-2013)/ERC grant n. 324085 , Principal investigator: Kjetil Storesletten at the University of Oslo).

Funding Information:
Any opinions expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System. For helpful comments, we thank our discussant José Mustre-del-Río, and also Mark Aguiar, Mark Bils, Marcus Hagedorn, Grey Gordon, Per Krusell, Ben Moll, Luigi Pistaferri, Kjetil Storesletten, Morten Ravn, Alex Wolman and other participants at U of Oslo, Econometric Society China Meeting 2018 in Shanghai, SED 2018, the 12th Nordic Summer Symposium in Macroeconomics, EEA/ESEM 2018 in Cologne, AEA 2019, Rochester, Yonsei, Seoul National U, Pittsburgh, Richmond Fed, SHUFE, Tsinghua PBC and ITAM. Jay Hong acknowledges financial support from Seoul National University (SNU ‘Overseas Training Expenses for Humanities & Social Sciences’). Yicheng Wang acknowledges financial support from the European Research Council ((FP7/2007-2013)/ERC grant n. 324085, Principal investigator: Kjetil Storesletten at the University of Oslo).

Publisher Copyright:
© 2021 Elsevier Inc.

All Science Journal Classification (ASJC) codes

Economics and Econometrics

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10.1016/j.red.2021.04.004

Cite this

@article{67f52a50a9714be791b75532a7b62376,

title = "Income volatility and portfolio choices",

abstract = "Based on administrative data from Statistics Norway, we find economically significant shifts in households{\textquoteright} 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.",

author = "Yongsung Chang and Hong, {Jay H.} and Marios Karabarbounis and Yicheng Wang and Tao Zhang",

note = "Funding Information: Any opinions expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System. For helpful comments, we thank our discussant Jos{\'e} Mustre-del-R{\'i}o, and also Mark Aguiar, Mark Bils, Marcus Hagedorn, Grey Gordon, Per Krusell, Ben Moll, Luigi Pistaferri, Kjetil Storesletten, Morten Ravn, Alex Wolman and other participants at U of Oslo, Econometric Society China Meeting 2018 in Shanghai, SED 2018, the 12th Nordic Summer Symposium in Macroeconomics, EEA/ESEM 2018 in Cologne, AEA 2019, Rochester, Yonsei, Seoul National U, Pittsburgh, Richmond Fed, SHUFE, Tsinghua PBC and ITAM. Jay Hong acknowledges financial support from Seoul National University (SNU {\textquoteleft}Overseas Training Expenses for Humanities & Social Sciences{\textquoteright}). Yicheng Wang acknowledges financial support from the European Research Council ((FP7/2007-2013)/ERC grant n. 324085 , Principal investigator: Kjetil Storesletten at the University of Oslo). Funding Information: Any opinions expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System. For helpful comments, we thank our discussant Jos{\'e} Mustre-del-R{\'i}o, and also Mark Aguiar, Mark Bils, Marcus Hagedorn, Grey Gordon, Per Krusell, Ben Moll, Luigi Pistaferri, Kjetil Storesletten, Morten Ravn, Alex Wolman and other participants at U of Oslo, Econometric Society China Meeting 2018 in Shanghai, SED 2018, the 12th Nordic Summer Symposium in Macroeconomics, EEA/ESEM 2018 in Cologne, AEA 2019, Rochester, Yonsei, Seoul National U, Pittsburgh, Richmond Fed, SHUFE, Tsinghua PBC and ITAM. Jay Hong acknowledges financial support from Seoul National University (SNU {\textquoteleft}Overseas Training Expenses for Humanities & Social Sciences{\textquoteright}). Yicheng Wang acknowledges financial support from the European Research Council ((FP7/2007-2013)/ERC grant n. 324085, Principal investigator: Kjetil Storesletten at the University of Oslo). Publisher Copyright: {\textcopyright} 2021 Elsevier Inc.",

year = "2022",

month = apr,

doi = "10.1016/j.red.2021.04.004",

language = "English",

volume = "44",

pages = "65--90",

journal = "Review of Economic Dynamics",

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AU - Chang, Yongsung

AU - Hong, Jay H.

AU - Karabarbounis, Marios

AU - Wang, Yicheng

AU - Zhang, Tao

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N2 - 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.

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SP - 65

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JO - Review of Economic Dynamics

JF - Review of Economic Dynamics

ER -

Income volatility and portfolio choices

Abstract

Bibliographical note

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