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Do disaster expectations explain household portfolios?

Alan, S (2012) 'Do disaster expectations explain household portfolios?' Quantitative Economics, 3 (1). 1 - 28. ISSN 1759-7323

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Abstract

It has been argued that rare economic disasters can explain most asset pricing puzzles. If this is the case, perceived risk associated with a disaster in stock markets should be revealed in household portfolios. That is, the framework that solves these pricing puzzles should also generate quantities that are consistent with the observed ones. This paper estimates the perceived risk of disasters (both probability and expected size) that is consistent with observed portfolios and consumption growth between 1983 and 2004 in the United States. I find that the portfolio choices of households that have less than a college degree can be partially explained by expectations of stock market disasters only if one allows for a large probability of labor income loss at the same time. Such disaster expectations, however, are not revealed in the portfolios of educated and wealthier households: simple per-period participation costs of the stock market coupled with preference heterogeneity explain their participation and investment patterns. © 2012 Sule Alan.

Item Type: Article
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 04 Sep 2013 09:48
Last Modified: 30 Jan 2019 16:18
URI: http://repository.essex.ac.uk/id/eprint/7518

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