Portfolio Choice With a Correlated Background Risk: Theory and Evidence

Subjective measures of risk aversion, fixed costs, and portfolio choice

“…In the Barsky et al (1997) experiment, questions are posed to all respondents in the Health and Retirement Study, consisting of individuals aged over 50. Arrondel and Calvo-Pardo (2002) asked the same questions to a representative sample of French households. In our case, the questions are asked to people who have a paid job (with the exclusion of the self-employed), look for a job either for the first time or after having lost one, and to students.…”

“…In contrast with the work by Barsky et al (1997), and Arrondel and Calvo-Pardo (2002) who adapt the same methodology to French data, our model will be a formal structural model of portfolio choice, in which we consider several different measures of risk attitude. One measure is based on hypothetical choices between uncertain income streams in a Dutch household survey, and closely related to the aforementioned work by Barsky et al (1997), and Arrondel and Calvo-Pardo (2002). The Barsky et al (1997) measure has a nice direct interpretation if individuals have CRRA preferences.…”

Mapping Risk Aversion in Norway Using Hypothetical Income Gambles

“…Before analyzing the response behavior econometrically, we compare our results with other studies. In table 2, we have restricted the sample to those in the same age group as in BJKS and we include results from the Kapteyn and Teppa (2002) and Arrondel and Calvo-Pardo (2002) studies along the with the original BJKS study.…”

Multiple Risks and Mean-Variance Preferences

“…In a study on optimal financial risk taking in the presence of return-correlated background uncertainty over income, Elmendorff and Kimball (2000) derive standardness as a sufficient condition for an increase in background risk to lead to a reduction in financial risk bearing whenever background and return risks are nonnegatively correlated; they exclude, however, negative correlations. In a similar framework, Arrondel and Calvo-Pardo (2002) analyse the effects of adding correlated background risks to a problem of portfolio choice. They observe that in order to generate a tempering effect on risk taking by adding small background risks, local risk vulnerability is no longer a necessary [sufficient] condition when background and endogenous risk are positively [negatively] correlated-which stands in marked contrast to the observation made by Gollier and Pratt (1996) for independent risks.…”