Working Paper: NBER ID: w12809
Authors: Markus K. Brunnermeier; Stefan Nagel
Abstract: 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.
Keywords: No keywords provided
JEL Codes: G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in liquid wealth (E21) | probability of stock market entry (G17) |
| changes in liquid wealth (E21) | probability of stock market exit (G17) |
| changes in liquid wealth (E21) | proportion of risky assets in households' portfolios (D14) |
| lagged effects of wealth changes (E21) | future risky asset shares (G12) |
| changes in liquid wealth (E21) | adjustments in risky asset shares (G11) |