This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review
  4. June 2008
  5. Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals

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

Download Full Text PDF

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.

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

Additional Materials

JEL Classification

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