Portfolio choice with a correlated background risk : theory and evidence
Arrondel, Luc and Calvo-Pardo, Hector (2002) Portfolio choice with a correlated background risk : theory and evidence. Paris, France, Centre National de la Recherche Scientifique, École Normale Supérieure, 36pp. (DELTA Working Paper Series, (DELTA Working Pater No.2002-16) ).
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In this paper, we extend the static portfolio choice problem with a small background risk to the case of small partially correlated background risks. We show that respecting the theories under which risk substitution appears, except for the independence of background risk, it is perfectly rational for the individual to increase his optimal exposure to portfolio risk when risks are partially negatively correlated. Then, we test empirically the hypothesis of risk substitutability using French households data. We found that households respond by increasing their stockholdings in response to the increase in future earnings uncertainty. This conclusion is in contradiction with results obtained in other countries.
So, in light of these results, our model provides an explanation to account for the lack of empirical consensus on cross-country tests of risk substitution theory that encompasses and criticises all of them.
|Item Type:||Monograph (Working Paper)|
|Subjects:||H Social Sciences > H Social Sciences (General)|
|Divisions:||University Structure - Pre August 2011 > School of Social Sciences > Economics
|Date Deposited:||01 Aug 2007|
|Last Modified:||02 Mar 2012 13:30|
|Publisher:||Centre National de la Recherche Scientifique, École Normale Supérieure|
|RDF:||RDF+N-Triples, RDF+N3, RDF+XML, Browse.|
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