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

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.