Consumption-income sensitivity and portfolio choice

Research output: Contribution to journalArticlepeer-review


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
Issue number1
StatePublished - Jun 1 2019

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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