Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/161031
Authors: 
Brown, Sarah
Gray, Daniel
Harris, Mark N.
Spencer, Christopher
Year of Publication: 
2016
Series/Report no.: 
IZA Discussion Papers 10408
Abstract: 
Analysing the US Panel Study of Income Dynamics, we present a new empirical method to investigate the extent to which households reduce their financial risk exposure when confronted with background risk. Our novel modelling approach – termed a deflated fractional ordered probit model – quantifies how the overall asset composition in a portfolio adjusts with background risk, and is unique in recovering for, any given risky asset class, the shares that are reallocated to a safer asset category. Background risk exerts a significant impact on household portfolios, resulting in a 'flight from risk', away from riskier to safe assets.
Subjects: 
asset allocation
background risk
flight from risk
fractional models
JEL: 
C33
C35
D14
G11
Document Type: 
Working Paper

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