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An empirical investigation of risk aversion, transaction costs and portfolio choice

Paiella, Monica; (2001) An empirical investigation of risk aversion, transaction costs and portfolio choice. Doctoral thesis (Ph.D), UCL (University College London). Green open access

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Abstract

The thesis focuses on household portfolio choice and looks at the role that transaction costs and individual risk aversion have in explaining observed behaviour. The first chapter focuses on the issue of heterogeneous financial market participation and determines a lower bound on the level of transaction costs that are required to reconcile observed portfolio choices with asset retums within an isoelastic utility framework. The bound is determined from the set of conditions that ensure the optimality of consumption behaviour by financial market non-participants. The evidence found using the US Consumer Expenditure Survey suggests that reasonably low costs can justify observed behaviour for degrees of risk aversion held as realistic by the literature. In the second chapter I explore a dimension of heterogeneity which can help explain why some households, but not others enter the stock market. Using the Bank of Italy Survey of Household Income and Wealth, I construct a direct measure of absolute risk aversion and relate it to consumers' endowment and attributes and to measures of exposure to background risk. The purpose of the analysis is to gather evidence on the amount of heterogeneity characterising individual attitudes towards risk and on its observability, on how the environment affects risk aversion and on how an index of risk aversion can help predict household decisions involving the undertaking of some risk, such as portfolio and occupation choice, the demand for insurance and moving decisions and also the propensity to change job and the health status. The last chapter completes the thesis with a study of the saving behaviour of US households. Using micro data from the Consumer Expenditure Survey, I employ cross sectional and synthetic cohort techniques to characterise the life cycle profile of saving rates and other variables of interest. In particular, I pay attention to the distinction between mandatory saving and discretionary saving and to their composition, relating also the evidence to the recent policy debate on saving incentives and their usefulness.

Type: Thesis (Doctoral)
Qualification: Ph.D
Title: An empirical investigation of risk aversion, transaction costs and portfolio choice
Open access status: An open access version is available from UCL Discovery
Language: English
Additional information: Thesis digitised by ProQuest.
Keywords: Social sciences; Household expenditures; Portfolio choice
URI: https://discovery.ucl.ac.uk/id/eprint/10099499
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