Household life-cycle asset allocation and background risk of labor income

Mingchao Cai*, Jun Zhao, Rulu Pan, Haozhi Huang

*Corresponding author for this work

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

Purpose – The purpose of this paper is to empirically analyze the relationship between risky asset allocation and background risk of Chinese residents.

Design/methodology/approach – Using Chinese macroeconomic data, this study uses numerical method to solve dynamic stochastic optimal problem. Findings – When risk of labor income is considered, ratio of risky asset declines with rising of age for those people with same age and wealth state; any of the following situations will lead to lower risky assets holdings: lower labor income growth expectations, higher labor income risk or higher labor and financial market covariance risk.

Research limitations/implications – This study uses real economy investment return as a proxy of risky asset return. Practical implications – Residents with higher background risks should hold less risky assets, and overcome home-bias problem during asset allocation.

Originality/value – This study takes two kinds of background risk into consideration: labor income risk, and covariance between labor income and risk asset.

Original languageEnglish
Pages (from-to)117-130
Number of pages14
JournalChina Finance Review International
Volume3
Issue number2
DOIs
Publication statusPublished - 10 May 2013
Externally publishedYes

Keywords

  • Assets
  • Background risk
  • China
  • Dynamic utility function
  • Employment
  • Income
  • Investments
  • Optimal portfolio
  • Personal finance
  • Returns

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