UBC Theses and Dissertations

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UBC Theses and Dissertations

Non tradeable human capital and household asset allocation Shim, Kyung Hwan


This thesis is comprised of two essays that investigate household consumption and portfolio choices in dynamic life cycle frameworks. In the first essay, I explain that stock market participation and stockholding are increasing in the level of education and financial wealth without relying on commonly used assumptions about differences in the cost of processing financial information among households. The key aspects of the model are recursive preferences, education attainment and stock market participation. Households with low risk aversion and high elasticity of intertemporal substitution (EIS) are more likely to exercise their education option, accumulate large wealth, invest in stock markets and invest heavily in stocks. These findings are consistent with three separate, but related, strands of the literature on i) household asset holding, ii) utility preferences based on household level financial data, and iii) utility preferences and education attainment. I find that, consistent with these studies, better educated households accumulate more financial wealth, hold a larger fraction of wealth in equity, have a higher EIS and are less risk averse than their less educated counterparts. In the second essay, I investigate the fact that the fraction of financial wealth invested in equity is increasing in financial wealth in the cross section of households, a known fact that contradicts existing theories in the literature. I show that the contemporaneous positive correlation between human capital and financial wealth values is increasing in the persistence of labor income shocks. While human capital and financial wealth independently have opposing direct effects on equity shares, human capital effects dominate if labor income shocks are highly persistent, generating increasing equity shares in financial wealth. Both a simple model and a realistically calibrated life cycle model of consumption and portfolio choice are shown to generate the results. The predictions are supported empirically using data from Panel Study of Income Dynamics. The essay shows that rising equity shares in financial wealth is a consequence of persistence in labor income shocks and its effects on the joint distribution of human capital, financial wealth accumulation and wealth composition in the cross section, and not a consequence of financial wealth effects alone, as commonly assumed.

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