Precautionary Motives and Portfolio Decisions

Research output: Contribution to JournalArticleAcademic

Abstract

This paper studies the empirical relevance of precautionary and other motives for household portfolio behaviour using recent panel data from the Netherlands, Dutch households' portfolios exhibit low degrees of risk taking and diversification. It is possible that this is the outcome of a rational, precautionary response to unavoidable exposure to background risk (stemming from the labour market or health conditions, etc.). We consider as alternative explanations liquidity needs and habits. The endogenous variable is the fraction of clearly safe in total financial assets at the household level. Parametric and semi-parametric censored regression models for pooled cross-sections and random and fixed effects models for panel data show that both heteroscedasticity and unobserved heterogeneity are of major importance in the data. With subjective indicators of income uncertainty we find a limited role for precautionary motives. Copyright © 2002 John Wiley & Sons, Ltd.
Original languageEnglish
Pages (from-to)61-77
Number of pages17
JournalJournal of Applied Econometrics
Volume18
DOIs
Publication statusPublished - 2004

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liquidity
diversification
habits
assets
Netherlands
labor market
uncertainty
income
regression
health
Household portfolios
Precautionary motive
Panel data
Health
Liquidity
Background risk
Labour market
Risk taking
Financial assets
Endogenous variables

Cite this

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title = "Precautionary Motives and Portfolio Decisions",
abstract = "This paper studies the empirical relevance of precautionary and other motives for household portfolio behaviour using recent panel data from the Netherlands, Dutch households' portfolios exhibit low degrees of risk taking and diversification. It is possible that this is the outcome of a rational, precautionary response to unavoidable exposure to background risk (stemming from the labour market or health conditions, etc.). We consider as alternative explanations liquidity needs and habits. The endogenous variable is the fraction of clearly safe in total financial assets at the household level. Parametric and semi-parametric censored regression models for pooled cross-sections and random and fixed effects models for panel data show that both heteroscedasticity and unobserved heterogeneity are of major importance in the data. With subjective indicators of income uncertainty we find a limited role for precautionary motives. Copyright {\circledC} 2002 John Wiley & Sons, Ltd.",
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Precautionary Motives and Portfolio Decisions. / Hochguertel, S.

In: Journal of Applied Econometrics, Vol. 18, 2004, p. 61-77.

Research output: Contribution to JournalArticleAcademic

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