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American Economic Review: Vol. 98 No. 3 (June 2008)

AER Volume. 98, Issue 3 | Previous ArticleNext Article

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Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals

Article Citation

Brunnermeier, Markus K., and Stefan Nagel. 2008. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals." American Economic Review, 98(3): 713-36.

DOI: 10.1257/aer.98.3.713

Abstract

We use data from the Panel Study of Income Dynamics to investigate how households portfolio allocations change in response to wealth fluctuations. Persistent habits, consumption commitments, and subsistence levels can generate time-varying risk aversion with the consequence that when the level of liquid wealth changes, the proportion a household invests in risky assets should also change in the same direction. In contrast, our analysis shows that the share of liquid assets that households invest in risky assets is not affected by wealth changes. Instead, one of the major drivers of household portfolio allocation seems to be inertia: households rebalance only very slowly following inflows and outflows or capital gains and losses.

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Download Data Set (4.68 MB) | Link to Appendix (286.80 KB)

Authors

Brunnermeier, Markus K. (Princeton U)
Nagel, Stefan (Stanford U)

JEL Classifications

D14: Personal Finance
D31: Personal Income, Wealth, and Their Distributions
G11: Portfolio Choice; Investment Decisions