Three essays on household portfolio choice
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Chapter II: This chapter examines effects of individual investors’ subjective risk perceptions on a household’s portfolio choices from a household bargaining perspective. Using the 2012 wave of the Health and Retirement Study (HRS), this paper finds that individual investors view the stock market to be much riskier than it actually is according to objective measures. After testing the sensitivity of the results to the bargaining power measures, this paper finds that household members have their impacts reflected on a household’s portfolio risk-taking decisions. Additionally, on average, controlling for demographic and other factors, a higher subjective risk perception of a household member tends to reduce the allocation of a household's portoflio to risky assets. Furthermore, the significance of the negative impact is influenced by the household members' bargaining powers, which are proxied by different characteristics, including the work hours, gender, bread-earner or not (i.e. work for pay or not), hourly wage rate, or years of education. The study finds the evidence that the household member with more bargaining power has a significant impact on the household portoflio choice and the other member with less bargaining power has no significant impact. Chapter III: This chapter constructs a household’s risk perception using the household members’ risk perceptions and empirically investigates a household’s risk perception as a new determinant of a household’s portfolio choices. Based on household members’ risk perceptions, this chapter examines a household’s risk perception using four different weighting schemes. Using the 2012 wave of the Health and Retirement Study (HRS), this paper finds that the household’s subjective risk perception can be best proxied by the higher risk perception of a wife and her husband (In other words, the spouse with higher risk perception has “all say” in determining household's risk perception). Risk perception weighted by bargaining power proxies, e.g., years of education or labor income, does not proxy for the household’s risk perception well. Controlling for a list of existing determinants, i.e., controlling for labor income risk effect, labor income effect, wealth effect, age effect, marriage effect, health effect, health change effect, religion effect, and other demographic factors, a household’s subjective risk perception is significantly negatively associated with the household’s portfolio allocation in risky assets. The findings in this paper can be practically useful in the investing planning process. Chapter IV: This chapter examines the effects of household bargaining on a household’s mortality risk hedging decisions. Using the 2012 wave of the Health and Retirement Study (HRS), there is clear empirical evidence that household bargaining significantly impacts a household’s decisions to hedge mortality risk (i.e., buying life insurance).