Research Papers
Wealth fluctuations and investment in risky assets: the UK micro evidence on households’ asset allocation
(Published in Journal of Empirical Finance)
This paper is the first to examine whether UK households exhibit constant or time varying relative risk aversion within a micro data panel setting. We analyse whether portfolio allocations in risky assets change in response to fluctuations in wealth. Our set of controls for background wealth is comprehensive, and include, as a novelty in this type of studies, pension wealth. The inference about the risk profile of British households depends on what is considered as the relevant measure of wealth. We do not find support for decreasing relative risk aversion (DRRA). Constant relative risk aversion (CRRA) prevails for the case of liquid wealth, but for the broadest definitions, those including home equity and pensions, the evidence favours increasing relative risk aversion (IRRA). [PDF]
(Published in Journal of Empirical Finance)
This paper is the first to examine whether UK households exhibit constant or time varying relative risk aversion within a micro data panel setting. We analyse whether portfolio allocations in risky assets change in response to fluctuations in wealth. Our set of controls for background wealth is comprehensive, and include, as a novelty in this type of studies, pension wealth. The inference about the risk profile of British households depends on what is considered as the relevant measure of wealth. We do not find support for decreasing relative risk aversion (DRRA). Constant relative risk aversion (CRRA) prevails for the case of liquid wealth, but for the broadest definitions, those including home equity and pensions, the evidence favours increasing relative risk aversion (IRRA). [PDF]
Households portfolio composition and their risk attitudes: the UK evidence with micro-data
(work in progress)
This paper investigates the relationship between subjective risk attitudes and household portfolio composition. This study adds to existing literature by examining how subjective risk aversion is related to both asset allocation decisions and asset ownership decisions using a large UK micro-data set. I first analyse whether households with higher subjective risk aversion tend to hold a lower proportion of risky assets in their portfolios. Secondly, I test whether highly risk-averse households are more likely to hold highly diversified portfolios. The empirical results of this paper suggest that the higher the subjective risk aversion the lower the risky asset share in households' liquid portfolios. This is consistent with standard portfolio theory. The results about the diversification decision are, however, not intuitive. The results indicate that highly risk-averse households tend to hold less diversified portfolios that consist of only risk-free assets. [PDF]
(work in progress)
This paper investigates the relationship between subjective risk attitudes and household portfolio composition. This study adds to existing literature by examining how subjective risk aversion is related to both asset allocation decisions and asset ownership decisions using a large UK micro-data set. I first analyse whether households with higher subjective risk aversion tend to hold a lower proportion of risky assets in their portfolios. Secondly, I test whether highly risk-averse households are more likely to hold highly diversified portfolios. The empirical results of this paper suggest that the higher the subjective risk aversion the lower the risky asset share in households' liquid portfolios. This is consistent with standard portfolio theory. The results about the diversification decision are, however, not intuitive. The results indicate that highly risk-averse households tend to hold less diversified portfolios that consist of only risk-free assets. [PDF]
Empirical analysis of in-sample and out-of-sample predictability of equity premium
This paper examines the predictability of the stock market equity premium in the US from 1927 to 2011. We undertake an extensive in-sample and out-of-sample analysis of the equity premium predictability, with different statistical tests on a large number of financial predictors. In particular, for the in-sample section, standard single factor regression models and quantile regression models are employed. For the out-of-sample section, we test the predictability both in statistical terms, focusing on forecasting errors, as well as in economic term, considering utility gains of a mean-variance agent. According to the results, several financial predictors such as dividend price ratio, dividend yield ratio, and earning price ratio show both in-sample and out-of-sample predictive ability for the equity premium. This evidence is even stronger if the analysis is constrained to expansions (in-sample) or recessions (out-of-sample) of business cycles. The results are generally robust to different forecasting horizons and frequencies. [PDF available soon]
This paper examines the predictability of the stock market equity premium in the US from 1927 to 2011. We undertake an extensive in-sample and out-of-sample analysis of the equity premium predictability, with different statistical tests on a large number of financial predictors. In particular, for the in-sample section, standard single factor regression models and quantile regression models are employed. For the out-of-sample section, we test the predictability both in statistical terms, focusing on forecasting errors, as well as in economic term, considering utility gains of a mean-variance agent. According to the results, several financial predictors such as dividend price ratio, dividend yield ratio, and earning price ratio show both in-sample and out-of-sample predictive ability for the equity premium. This evidence is even stronger if the analysis is constrained to expansions (in-sample) or recessions (out-of-sample) of business cycles. The results are generally robust to different forecasting horizons and frequencies. [PDF available soon]