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Household life‐cycle asset allocation and background risk of labor income

Mingchao Cai (Antai College of Economics and Management, Shanghai Jiaotong University, Shanghai, China)
Jun Zhao (Antai College of Economics and Management, Shanghai Jiaotong University, Shanghai, China)
Rulu Pan (Research School of Finance, Actuarial Studies and Applied Statistics, Australian National University, Canberra, Australia)
Haozhi Huang (Research School of Finance, Actuarial Studies and Applied Statistics, Australian National University, Canberra, Australia)

China Finance Review International

ISSN: 2044-1398

Article publication date: 10 May 2013

737

Abstract

Purpose

The purpose of this paper is to empirically analyze the relationship between risky asset allocation and background risk of Chinese residents.

Design/methodology/approach

Using Chinese macroeconomic data, this study uses numerical method to solve dynamic stochastic optimal problem.

Findings

When risk of labor income is considered, ratio of risky asset declines with rising of age for those people with same age and wealth state; any of the following situations will lead to lower risky assets holdings: lower labor income growth expectations, higher labor income risk or higher labor and financial market covariance risk.

Research limitations/implications

This study uses real economy investment return as a proxy of risky asset return.

Practical implications

Residents with higher background risks should hold less risky assets, and overcome home‐bias problem during asset allocation.

Originality/value

This study takes two kinds of background risk into consideration: labor income risk, and covariance between labor income and risk asset.

Keywords

Citation

Cai, M., Zhao, J., Pan, R. and Huang, H. (2013), "Household life‐cycle asset allocation and background risk of labor income", China Finance Review International, Vol. 3 No. 2, pp. 117-130. https://doi.org/10.1108/20441391311330573

Publisher

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Emerald Group Publishing Limited

Copyright © 2013, Emerald Group Publishing Limited

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