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Working Papers

March 2020, No. 20-01R

Income Volatility and Portfolio Choices (Revised September 2020)

Yongsung Chang, Jay H. Hong, Marios Karabarbounis, Yicheng Wang and Tao Zhang

Based on administrative data from Statistics Norway, we find economically significant shifts in households' financial portfolios around individual structural breaks in labor-income volatility. According to our estimates, when income risk doubles, households reduce their risky share of financial assets by 5 percentage points, thus tempering their overall risk exposure. We show that our estimated risky share response is consistent with a standard portfolio choice model augmented with idiosyncratic, time-varying income volatility.


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