Endogenous non-tradable earnings and households’ demand for risky assets

Abstract

Using French survey data, we explore empirically whether earnings uncertainty and borrowing constraints decrease households demand for risky assets, consistent with theoretical predictions. A major empirical problem is the potential endogeneity bias of income risk, as more risk averse households may simultaneously choose safer occupations and invest less in risky assets. Even if we control for households risk preferences, we find that households respond by increasing their stockholdings in response to earnings uncertainty but not to liquidity constraints. We show that these empirical findings are consistent with an occupational risk return trade-off, whereby less risk averse households choose riskier occupations and hold riskier portfolios.

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ORCID for Hector Calvo-Pardo: orcid.org/0000-0001-6645-4273

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