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

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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

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

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Publisher
Emerald Publishing
Copyright
Copyright © 2013 Emerald Group Publishing Limited. All rights reserved.
ISSN
2044-1398
DOI
10.1108/20441391311330573
Publisher site
See Article on Publisher Site

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.

Journal

China Finance Review InternationalEmerald Publishing

Published: May 10, 2013

Keywords: China; Personal finance; Employment; Income; Investments; Returns; Assets; Background risk; Optimal portfolio; Dynamic utility function

References