proper risk aversion on introduit et on etudie une condition comportementale significative sur les fonctions d utilite pour les richesses qui signifie qu une loterie indesirable ne peut jamais etre rendue desirable par la presence d une loterie indesirable independante

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

intertemporal pricing and price discrimination a semiparametric hedonic analysis of the personal computer market we apply a smooth coefficient semiparametric model to a unique high frequency data set to examine the intertemporal pricing of personal computers furthermore we test whether firms charge differential component prices for their top performance personal computers and whether premium firms charge both a premium for all their computers and a premium for their top performance ones we find nonlinear effects in the pricing of personal computer components we also find that firms in general do not charge differential prices for the components of their top performance computers in addition high quality firms charge higher premia only for their most advanced products copyright 2006 john wiley sons ltd

portfolio choice and liquidity constraints we study the infinite horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle we show why the puzzle is robust to several model variations and argue that positive correlation between earnings shocks and stock returns is unlikely to provide an empirically plausible resolution we find that relatively small fixed costs for stock market entry are sufficient to deter stockholding because for a plausible range of parameter values households can achieve desired consumption smoothing with small or zero holdings of stocks such costs could arise from informational considerations sign up fees and investor inertia

temperance in stock market participation evidence from france we explore empirically whether earnings uncertainty and borrowing constraints deter households from the stock market consistent with the predictions of theoretical studies of portfolio choice in the presence of uninsurable earnings since recent extensions highlight the importance of the correlation between earnings and financial risks here we use a self assessed proxy from the delta tns 2002 cross sectional survey to empirically assess the impact although income risk does not affect the participation decision of households reporting a negative correlation it does lower the participation of those who report a non negative sign consistent with economic theory predictions

income hedging and portfolio decisions we examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns decreases surprisingly empirical studies find limited support for the income hedging motive using a rich unique dutch data set and the national longitudinal survey of the youth nlsy from the united states we show that when the income return correlation is low individuals exhibit a greater propensity to participate in the market and allocate a larger proportion of their wealth to risky assets even when the income risk is high individuals exhibit a higher propensity to participate in the market when the hedging potential is high these findings suggest that income hedging is an important determinant of stock market participation and asset allocation decisions

wealth and portfolio composition theory and evidence we examine a survey of 6010 u s households and estimate a model for household portfolio allocation we extend the conventional portfolio choice model in order to capture the observed incompleteness of household portfolios we show that the empirical specification of the joint discrete and continuous choice that characterizes household portfolio behavior is a switching regressions model with endogenous switching we go on to examine the impact of taxes on portfolio composition using detailed survey data to calculate precisely the marginal tax rate facing each household finally we estimate wealth elasticities of demand for a range of assets and liabilities

how important is precautionary saving we estimate how much of the wealth of a sample of psid respondents is held because some households face more income uncertainty than others we begin by solving a theoretical model of saving which we use to develop appropriate measures of uncertainty we then regress measures of wealth on our measures of uncertainty and find evidence that households engage in precautionary saving finally we simulate the wealth distribution that our empirical results imply would prevail if all households had the same uncertainty as the lowest uncertainty group we find that between 39 and 46 percent of wealth in our sample is attributable to the extra uncertainty that some consumers face compared to the lowest uncertainty group

structural estimation of stock market participation costs abstract this paper develops and estimates a dynamic model of stock market participation where consumers decisions regarding stock market participation are influenced by participation costs the practical significance of the participation costs is considered as being a channel through which financial education programs can affect consumers investment decisions using household data from the panel study of income dynamics i estimate the magnitude of the participation cost allowing for individual heterogeneity in it the results show the average stock market participation cost is about 4 6 of labor income however it varies substantially over consumers life the model successfully predicts the level of the observed participation rate and the increasing pattern of stock market participation over the consumers life cycle

the nature of precautionary wealth abstract this paper uses the panel study of income dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty however the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cucle model in which consumers are patient enough to begin saving for retirement early in life wealth is estimated to be far less sensitive to uncertainty than implied by that model instead our results suggest that over most of their working life time consumers behave in accordance with the buffer stock models of saving described in carroll 1992 1997 or deaton 1991 in which consumers hold wealth principally to insulate consumption against near term fluctuations in income

stockholding behavior of u s households evidence from the 1983 1989 survey of consumer finances most households persistently invest in riskless assets but not stocks and may do so because they perceive information required for market participation to be costly relative to expected benefits in a consumption capital asset pricing model ccapm increased risk aversion income risk and lower resources reduce the information expense sufficient to deter stockholding bivariate probit analysis using the 1983 1989 survey of consumer finances shows that households with lower risk aversion higher education and greater wealth who were nonstockholders in 1983 had an increased conditional probability of entering by 1989 whereas 1983 stockholders with lower resources more limited education and greater risk aversion were more likely to be nonstockholders by 1989

optimal portfolio choice for long horizon investors with nontradable labor income this paper examines how risky labor income and retirement affect optimal portfolio choice with idiosyncratic labor income risk the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors consistent with the typical recommendations of investment advisors increasing idiosyncratic labor income risk raises investors willingness to save and reduces their stock portfolio allocation towards the level of retired investors positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors financial advisors typically recommend that their customers invest more in stocks than in safe assets when they are working and to shift their investments towards safe assets when they retire jagannathan and kocherlakota 1996 malkiel 1996 by contrast the standard academic models of portfolio choice merton 1969 1971 samuelson 1969 show that retirement is irrelevant for portfolio decisions if investment opportunities are constant and human capital is tradable in this case the fraction of wealth optimally invested in risky assets should be constant over the lifetime of an individual recent research building on the pioneering work by merton 1971 shows that time varying investment opportunities result in portfolio rules with an intertemporal hedging component whose magnitude depends on the investment horizon of the investor kim and omberg 1996 balduzzi and lynch 1997 brennan schwartz and lagnado 1997 brandt 1999 campbell and viceira 1999 2001 barberis 2000 with time variation in investment opportunities retirement and death play an instrumental role as events that exogenously fix the individual s investment horizon more importantly retirement also marks the time at which individuals stop working and thereafter must live off their lifetime savings and possibly transfers from this perspective retirement matters for portfolio choice

portfolio choice in the presence of background risk in this paper we focus on how the presence of background risks from sources such as labour and entrepreneurial income influences portfolio allocations this interaction is explored in a theoretical model that is calibrated using cross sectional data from a variety of sources the model is shown to be consistent with some but not all aspects of cross sectional observations of portfolio holdings the paper also provides a survey of the extensive theoretical and empirical literature on portfolio choice

the car park diffusion models revisited abstract growth in the car park in two countries the uk and japan is studied with the help of a diffusion model of car ownership the model interprets the complicated dynamics of the car park in particular the transitions between different stages of growth in terms of three effects product diffusion income dispersion and income growth from the insights gained in the analysis a specific parameterized non linear lifecycle model of car ownership is constructed which is of use in the investigation of a range of issues including the impact of social trends and green policies on car ownership

the effects of marital status and children on savings and portfolio choice this paper investigates the impact of demographic shocks on optimal decisions about saving life insurance and most centrally asset allocation we analyze these choices within the framework of a life cycle model that features exogenous changes in family composition heterogeneity in lifetime income and uninsurable fluctuations in earnings and medical costs our analysis indicates that marital status transitions and children can have important effects on optimal household decisions widowhood induces sharp reductions in the portfolio shares in stock and the impact is largest for women and individuals with children divorce causes men and women to reallocate their portfolios in different directions men choose much riskier allocations while women opt for safer ones children play a fundamental role in the optimal portfolio decisions men with children for example increase their shares in response to divorce by less than half as much as men without children comparing our simulation results with panel data evidence on stockholding from the psid and the hrs we conclude that changes in marital status and children matter empirically as well but not always in the ways that the model predicts

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

stock market participation family responses to housing consumption commitments as of 2007 many households had taken on very substantial commitments to housing and companion mortgage payments at the same time they held little in the way of a traditional buffer stock of safer liquid assets but were more likely to have opened stock market accounts many of these families when experiencing subsequent mortgage payment difficulties are shown to have been more likely to exit the stock market mortgage difficulties also inhibited families from becoming new stock market participants in this way stocks seem to have likely experienced some direct and indirect collateral damage from the housing market 2007 9

does buffer stock saving explain the smoothness and excess sensitivity of consumption one of the lasting contributions to modernday consumer theory is the idea that consumption is determined by the expected value of lifetime resources or permanent income the modern day specification of this concept is typically presented as a special case of intertemporalchoice theory where felicity functions are quadratic labor income is stochastic there are no restrictions on borrowing consumers have infinite horizons and expectations are formed rationally we refer to this model as the permanentincome hypothesis pih although the pih has considerable intuitive appeal a series of influential papers published after its inception revealed two notable discrepancies between the model s predictions and aggregate data first the model predicts that consumption growth should be more volatile than income growth if aggregate income growth has positive serial correlation as the quarterly data suggest it does yet aggregate consumption growth is in fact much smoother than aggregate income growth angus deaton 1987 john y campbell and deaton 1989 jordi gali 1991 second the pih predicts that consumption changes should be orthogonal to predictable or lagged income changes yet the coffelation between consumption growth and lagged income growth has been found to be one of the most robust features of aggregate data for example marjorie a flavin 1981 alan s blinder and deaton 1985 campbell and n gregory mankiw 1989 orazio p attanasio and guglielmo weber 1993 thus aggregate consumption growth has been described as exhibiting two puzzles it is both excessively smooth relative to current labor income growth and excessively sensitive to lagged labor income growth 2 in response to these and other empirical anomalies researchers have recently sought out modifications of the pih framework chief ludvigson federal reserve bank of new york 33 liberty street new york ny 10045 michaelides university of cyprus p o box 20537 1678 nicosia cyprus a previous version of this paper appeared under the title can we explain the consumption excesses yet aggregate consumption implications of buffer stock saving behavior for many helpful comments we thank orazio attanasio dave backus ben bernanke john y campbell christopher carroll todd clark angus deaton pierreolivier gourinchas bo honore james kahn martin lettau costas meghir christina paxson steve pischke andrew samwick christopher sims mark watson guglielmo weber michael woodford steve zeldes and two anonymous referees conference participants at the national bureau of economic research summer workshop on the aggregate implications of microeconomic consumption behavior july 1998 the tmr workshop on saving and pensions center tilburg university march 1999 and the new york area macroeconomics workshop october 1998 seminar participants at columbia university insead the new york federal reserve university college london london business school city university business school university of cyprus tel aviv university and jeffrey brown for excellent research assistance the views expressed are those of the authors and do not necessarily reflect those of the federal reserve bank of new york or the federal reserve system any errors or omissions are the responsibility of the authors 1 note that the important insight of danny quah 1990 that individuals may be better able than econometricians to distinguish short run from long run innovations to their income cannot resolve the excess smoothness puzzle laid out in campbell and deaton 1989 these authors show that in the context of the pih excess sensitivity and excess smoothness are the same phenomena in addition campbell 1987 demonstrates that superior information of the type emphasized by quah will show up in households saving behavior and using this information allows the econometrician to control for the agent s private information when predicting income since excess sensitivity is well established and controlling for saving does not eliminate it see campbell and deaton 1989 the observed smoothness of consumption cannot be explained by superior information on the part of permanent income consumers see deaton 1992 for further discussion 2 philippe bacchetta and stefan gerlach 1997 and ludvigson 1999 document another kind of excess sensitivity the correlation between consumption growth and predictable changes in consumer credit although we do not explore these findings here ludvigson finds that a bufferstock model with time varying liquidity constraints can replicate such a correlation

borrowing costs and the demand for equity over the life cycle abstract we construct a life cycle model that delivers realistic behavior for both equity holdings and borrowing the key model ingredient is a wedge between the cost of borrowing and the risk free investment return borrowing can either raise or lower equity demand depending on the cost of borrowing a borrowing rate equal to the expected return on equity which we show roughly matches the data minimizes the demand for equity alternative models with no borrowing or limited borrowing at the risk free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings

life cycle portfolio choice the role of heterogeneous under diversification the empirical work on household portfolio choice documents two facts one the stock market participation rate is low and hump shaped over the life cycle two the conditional share of stocks is also low but does not appear to change much during the life cycle in contrast the standard life cycle portfolio choice model predicts high and monotonically increasing participation rates and conditional stock shares that are low and exhibit dramatic changes with age in this paper i consider a number of extensions to this basic framework i find that a small per period participation cost is needed to generate a hump shaped life cycle profile of participation rates under a realistic calibration the quantitative effect is minor progressive social security and the assumption that the risk of stock portfolios is declining in household wealth as a consequence of better diversification opportunities an assumption that has some empirical support though provide substantial amplification and significantly improve the ability of the model to match the data under diversification also reduces the average portfolio share of stocks conditional on participation and together with the intergenerational transmission of wealth makes it insensitive to age consistent with the empirical evidence

life cycle saving insights from the perspective of bounded rationality this paper provides a new life cycle model that takes into account key elements of bounded rationality the paper shows that the model can account for patterns in the data that are hard to explain by the standard life cycle model among other patterns the model predicts that typically the young either hold no equity or their equity portfolio share is rather low and then increases over working life the analytical solution of the model demonstrates its high degree of tractability

compensating wage differentials for schooling risk in denmark in this paper we analyse the association between wage differentials and risk using detailed information on length and type of education as seen in danish administrative registers our contribution to the literature is that we distinguish between transitory time series and permanent cross sectional income shocks and estimate the compensation for both sorts of risk we find that wage risk in a given education cell is associated with higher wages while skewness is associated with lower wages as a robustness check we see that ad hoc risk measures based on earnings mobility indicators confirm these findings

robustly strategic consumption portfolio rules with informational frictions this paper provides a tractable continuous time constant absolute risk aversion gaussian framework to explore how the interactions of fundamental uncertainty model uncertainty due to a preference for robustness and state uncertainty due to information processing constraints rational inattention affect strategic consumption portfolio rules and precautionary savings in the presence of uninsurable labor income specifically after solving the model explicitly i compute and compare the elasticities of strategic asset allocation and precautionary savings to risk aversion robustness and inattention furthermore for plausibly estimated and calibrated model parameters i quantitatively analyze how the interactions of model uncertainty and state uncertainty affect the optimal share invested in the risky asset and show that they can provide a potential explanation for the observed stockholding behavior of households with different education and income levels this paper was accepted by neng wang finance

portfolio inertia and stock market fluctuations this paper uses population wide data from the panel study of income dynamics and the survey of consumer finances to resolve the conflict between overtrading and inactivity shown in administrative data on brokerage and retirement accounts respectively considerable inertia is found and linked to characteristics e g limited education or resources but less to index movements the downswing has encouraged staying out rather than getting out of the market the small minority with brokerage accounts exhibits important differences in trading patterns relative to the population and invests small fractions of wealth in brokerage accounts results strengthen the case for default options in retirement accounts and built in trading provisions in mutual funds

life cycle portfolio choice with liquid and illiquid financial assets abstract traditionally quantitative models that have studied households portfolio choices have focused exclusively on the different risk properties of alternative financial assets we introduce differences in liquidity across assets in the standard life cycle model of portfolio choice more precisely in our model stocks are subject to transaction costs as considered in recent macroliterature we show that when these costs are calibrated to match the observed infrequency of households trading the model is able to generate patterns of portfolio stock allocation over age and wealth that are constant or moderately increasing thus more in line with the existing empirical evidence

individual income incomplete information and aggregate consumption individual income is much more variable than aggregate per capita income i argue that aggregate information is therefore not very important for individual consumption decisions and study models of life cycle consumption in which individuals react optimally to their own income process but have incomplete or no information on economy wide variables since individual income is less persistent than aggregate income consumers will react too little to aggregate income variation aggregate consumption will be excessively smooth since aggregate information is slowly incorporated into consumption aggregate consumption will be autocorrelated and correlated with lagged income on the other hand the model has the same prediction for micro data as the standard permanent income model the second part of the paper provides empirical evidence on individual and aggregate income processes different models for individual income are fit to quarterly data from the survey of income and program participation making various adjustments for measurement error calibrating the consumption model using the estimated parameters for the income process yields predictions which qualitatively correspond to the empirical findings for aggregate consumption but do not match them well in magnitude

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

asset pricing with limited risk sharing and heterogeneous agents we develop a model with incomplete markets and heterogeneous agents that generates a large equity premium while simultaneously matching stock market participation and individual asset holdings the high risk premium is driven by incomplete risk sharing among stockholders which results from the combination of aggregate uncertainty borrowing constraints and a realistically calibrated life cycle earnings profile subject to idiosyncratic shocks we show that it is challenging to simultaneously match asset pricing moments and individual portfolio decisions while limited participation has a negligible impact on the risk premium contrary to the results of models where it is imposed exogenously

international portfolio choice liquidity constraints and the home equity bias puzzle this paper solves for optimal international portfolio choice in the presence of liquidity constraints and undiversifiable labor income risk optimal portfolios are internationally diversified while positive correlation between domestic stock market returns and permanent labor income shocks can generate a complete portfolio specialization in foreign stocks nevertheless either small costs associated with investing abroad or a slightly positive domestic to foreign equity premium differential are sufficient to either deter households from participating in a foreign market or generate a substantial bias for home equities the benefits of international diversification are limited because consumption fluctuations can be smoothed with a small amount of buffer stock saving while exchange rate risk makes foreign investments less appealing to risk averse investors

work power and earnings of women and men numerous studies have established that part of the very substantial male female earnings gap is explained by differences in the amount of human capital workers have accumulated see for example jacob mincer and haim ofek 1983 institutional factors have also been found to play a role in determining wages david gordon et al 1982 occupation further helped to explain the remaining gap but several researchers have shown that introducing dimensions of work authority by taking into account the individual s position in the work hierarchy explains more of the variation in earnings than does occupation martha hill 1980 last two recent studies ferber and spaeth 1984 spaeth 1985 also included control over monetary resources this variable added substantially to the explanatory power of earnings regressions even after human capital variables institutional factors and several other measures of work authority had been entered like the other studies ferber and spaeth also found that reward structures for men and women are quite different suggesting the possible existence of discrimination the question whether women may also be at a disadvantage in achieving control over monetary resources was not investigated when hill examined the process of achievement of work authority she found substantial differences between male and female workers in this paper we examine whether the same is true for attaining financial control i data and analysis

precautionary portfolio behavior from a life cycle perspective abstract the literature on household asset accumulation draws a sharp distinction between short run precautionary motives to buffer consumption from annual income shocks and long run life cycle considerations under income certainty however estimates of shock persistence imply considerable career uncertainty we study long run precautionary motives for life cycle wealth accumulation and portfolios allowing for uncertain returns incomes and lifespan we separate the effects of various factors on mean and median asset holdings including education risk aversion household heterogeneity bequests impatience variance and serial correlation of income shocks numerical solutions are compared with data from the 1992 survey of consumer finances

asset market participation and portfolio choice over the life cycle using error free data on life cycle portfolio allocations of a large sample of norwegian households we document a double adjustment as households age a rebalancing of the portfolio composition away from stocks as they approach retirement and stock market exit after retirement when structurally estimating an extended life cycle model the parameter combination that best fits the data is one with a relatively large risk aversion a small per period participation cost and a yearly probability of a large stock market loss in line with the frequency of stock market crashes in norway

asset holding and consumption volatility we investigate the possibility that limited participation in asset markets and the stock market in particular might explain the lack of correspondence between the sample moments of the intertemporal marginal rate of substitution and asset returns in u k data we estimate ownership probabilities to separate likely shareholders from nonshareholders enabling us to control for changing composition effects as well as selection into the group we then construct estimates of the imrs for each of these different groups and consider their time series properties we find that the consumption growth of shareholders is more volatile than that of nonshareholders and more highly correlated with excess returns to shares in particular one cannot reject the predictions of the consumption capital asset pricing model for the group of households predicted to own both assets this is in contrast to the failure of the model when estimated on data for all households

consumption smoothing and portfolio rebalancing the effects of adjustment costs abstract a household s response to income and return shocks depends on the costs of portfolio adjustment in particular the extent of portfolio rebalancing and consumption smoothing are influenced by the presence of non convex portfolio adjustment costs suppose bonds can be adjusted costlessly while adjustments to stock accounts entail adjustment costs due to these portfolio adjustment costs the household demands both stocks and bonds a household can buffer some income fluctuations without incurring adjustment costs and engage in costly portfolio rebalancing less frequently using the estimated preference parameters and portfolio adjustment costs the response to income and return shocks is nonlinear and reflects the interaction of portfolio rebalancing and consumption smoothing

smoothing with liquid and illiquid assets abstract a quantitative examination of the demand for liquid assets arising from consumption smoothing motives reveals that such demand is very low consumers faced with income streams calibrated to match income and unemployment data and returns and transactions costs calibrated to match us treasury bill data almost exclusively buy and hold illiquid long term assets even though the return premium on long term assets is quite small this is because with standard preferences savings are highly persistent even when risky income is not in the calibrated model the first order autocorrelation of savings is an order of magnitude larger than that of income

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society