Do Wealth Fluctuations Generate Time-varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation
We use data from the PSID to investigate how households' portfolio allocations change in response to wealth fluctuations. Persistent habits, consumption commitments, and subsistence levels can generate time-varying risk aversion with the consequence that when the level of liquid wealth changes, the proportion a household invests in risky assets should also change in the same direction. In contrast, our analysis shows that the share of liquid assets that households invest in risky assets is not affected by wealth changes. Instead, one of the major drivers of households' portfolio allocation seems to be inertia: households rebalance only very slowly following inflows and outflows or capital gains and losses.
We thank John Campbell, Darrell Duffie, Mark Gertler, Francisco Gomes, Joy Ishii, Frank de Jong, Christian Julliard, Martin Lettau, Chris Malloy, Filippos Papakonstantinou, Jonathan Parker, Jacob Sagi, Ken Singleton, Ilya Strebulaev, Annette Vissing-Jorgensen, Yihong Xia, Motohiro Yogo, two anonymous referees, and seminar participants at the CEPR Meetings in Gerzensee, the Five-Star Conference at NYU, HECER Helsinki, Humboldt University Berlin, IAEEG Trier, London School of Economics, the Stanford-Berkeley joint Finance seminar, and UC Irvine for useful comments. Brunnermeier acknowledges financial support from the National Science Foundation and the Alfred P. Sloan Foundation. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Brunnermeier, Markus K. and Stefan Nagel. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals." American Economic Review 98, 3 (2008): 713-736.