Labor Income Risk and the Reluctance of Households to Invest in Risky Financial Assets: A Panel Data Analysis

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Dokumentart: Article
Date: 2014
Source: University of Tübingen Working Papers in Economics and Finance ; 72
Language: English
Faculty: 6 Wirtschafts- und Sozialwissenschaftliche Fakultät
Department: Wirtschaftswissenschaften
DDC Classifikation: 330 - Economics
Keywords: Einkommen
Other Keywords:
household nance
risky asset market participation
labor income risk
behavioral nance
unobserved heterogeneity
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We investigate the determinants of a household's decision on whether to invest in risky financial assets. Financial theory suggests that with increasing labor income risk, the reluctance of households to hold stocks increases. We propose to measure income risk as the observed variation of household income over a five year period. We find that indeed higher income risk reduces the propensity to invest in stocks. 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.

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