Risk free asset demand in the classic portfolio problem is shown
to decrease with income if and only if the consumer's uncertainty
preferences over assets satisfy the preference condition that the risk
free asset is more readily substituted for the risky asset as the quantity
of the latter increases. In this case, the risky asset is said to be
"urgently needed" following the terminology of the classic certainty
analysis of Johnson (1913). The urgently needed property tends to be
more readily satisfied in uncertainty versus certainty settings. Asset
pricing implications of this property are provided.
Kubler, Felix, Larry Selden, and Xiao Wei.
"When Is a Risky Asset "Urgently Needed"?"
American Economic Journal: Microeconomics,
Consumer Economics: Theory
General Equilibrium and Disequilibrium: Financial Markets
Criteria for Decision-Making under Risk and Uncertainty
Portfolio Choice; Investment Decisions
Asset Pricing; Trading Volume; Bond Interest Rates