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Income hedging and portfolio decisions
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Bonaparte, Yosef, Korniotis, George M. and Kumar, Alok (2014) Income hedging and portfolio decisions. Journal of Financial Economics, 113 (2). pp. 300-324. doi:10.1016/j.jfineco.2014.05.001 ISSN 0304-405X.
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Official URL: http://dx.doi.org/10.1016/j.jfineco.2014.05.001
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.
Item Type: | Journal Article | ||||||||
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Journal or Publication Title: | Journal of Financial Economics | ||||||||
Publisher: | Elsevier Science BV | ||||||||
ISSN: | 0304-405X | ||||||||
Official Date: | August 2014 | ||||||||
Dates: |
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Volume: | 113 | ||||||||
Number: | 2 | ||||||||
Page Range: | pp. 300-324 | ||||||||
DOI: | 10.1016/j.jfineco.2014.05.001 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access |
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