Consumption-income sensitivity and portfolio choice

Research output: Contribution to journalArticle

Abstract

Contrary to the predictions of traditional life-cycle models, household consumption is excessively sensitive to current income. Similarly, weak evidence of income hedging runs against standard portfolio theory. We link these two puzzles by modifying the theoretical framework of Viceira (2001) to study how consumption-income sensitivities generated by income in the utility function affect households' portfolio choices. Empirically, we find that consumption-income sensitivities affect asset allocation through the income hedging channel. In particular, we show that the interaction between consumption-income sensitivity and the correlation of income growth to stock market returns is an important explanatory variable for households' stock market holdings.

Original languageEnglish (US)
Pages (from-to)91-136
Number of pages46
JournalReview of Asset Pricing Studies
Volume9
Issue number1
DOIs
StatePublished - Jan 1 2019

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Portfolio choice
Income
Hedging
Theoretical framework
Prediction
Utility function
Household consumption
Stock market
Life-cycle model
Stock market returns
Household
Asset allocation
Portfolio theory
Income growth
Interaction
Household portfolios

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Consumption-income sensitivity and portfolio choice. / Addoum, Jawad M.; Delikouras, Stefanos; Korniotis, George.

In: Review of Asset Pricing Studies, Vol. 9, No. 1, 01.01.2019, p. 91-136.

Research output: Contribution to journalArticle

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