Income hedging and portfolio decisions

Research output: Contribution to journalArticle

19 Scopus citations

Abstract

We examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives. Economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns decreases. Surprisingly, empirical studies find limited support for the income hedging motive. Using a rich, unique Dutch data set and the National Longitudinal Survey of the Youth (NLSY) from the United States, we show that when the income-return correlation is low, individuals exhibit a greater propensity to participate in the market and allocate a larger proportion of their wealth to risky assets. Even when the income risk is high, individuals exhibit a higher propensity to participate in the market when the hedging potential is high. These findings suggest that income hedging is an important determinant of stock market participation and asset allocation decisions.

Original languageEnglish (US)
Pages (from-to)300-324
Number of pages25
JournalJournal of Financial Economics
Volume113
Issue number2
DOIs
StatePublished - Aug 2014

Keywords

  • Asset allocation
  • Household finance
  • Income risk-return correlation
  • Market participation
  • Temporary and permanent income shocks

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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