Les Cahiers de Recherche - HEC Paris
Twin picks: disentangling the determinants of risk-taking in household portfolios
() and Paolo Sodini
Abstract: Author's abstract. This paper investigates the
determinants of financial risk-taking and documents new facts on the
financial wealth elasticity of the risky share in a panel of swedish twins.
We consider a uniquely comprehensive set of demographic and financial
characteristics, and use yearly twin pair fixed effects to control for
genes and shared background. Consistent with cross-sectional evidence (e.g.
Carroll 2002) but in contrast to recent panel studies, we document that
financial wealth is the dominant characteristic driving the asset
allocation of individual investors. The average financial wealth elasticity
of the risky share is positive and strongly significant among participants,
which suggests that individual investors have decreasing relative risk
aversion. Furthermore, the financial wealth elasticity of the risky share
itself is heterogeneous across investors and varies strongly with
characteristics; the elasticity decreases with financial wealth and human
capital, and increases with habit, residential real estate, and household
size. As a consequence, the elasticity of the aggregate demand for risky
assets to exogenous wealth shocks is close to, but does not coincide with,
the elasticity of a representative investor with constant relative risk
aversion. We confirm the robustness of our results by running
time-differenced instrumental variable regressions, and by controlling for
zygosity, lifestyle, mental and physical health, the intensity of
communication between twins, and measures of social interactions.
Keywords: asset allocation; communication; genetics; habit formation; human capital; labor income; leverage; participation; risk-taking; social interactions; twin study; (follow links to similar papers)
JEL-Codes: C23; D14; G11; (follow links to similar papers)
97 pages, June 1, 2011
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