Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240712 
Year of Publication: 
2021
Series/Report no.: 
Working Papers No. 2021-03
Publisher: 
Banco de México, Ciudad de México
Abstract: 
This paper examines empirically the effect of the level of personal bankruptcy protection in the US on households' demand for financial assets. A Chapter 7 bankruptcy allows protecting the home equity up to a certain limit or "exemption". Previous literature shows that such exemption biases investment towards home equity. This paper tests whether it also lowers investment in stocks, which are not protected in bankruptcy. Using an instrumental variable approach, I estimate a lower stock market participation when the home equity is below the exemption, but the result is not robust, and households at higher risk of bankruptcy do not exhibit a stronger response. Moreover, investment in home equity is not higher when the home is fully protected. These findings suggest no substantial portfolio distortions from the level of home equity that is protected in bankruptcy.
Subjects: 
Personal bankruptcy law
Home equity protection
Stock market participation
Portfolio allocation
JEL: 
D14
G00
G11
K35
Document Type: 
Working Paper
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