Mingchao Cai, Jun Zhao, Rulu Pan and Haozhi Huang
The purpose of this paper is to empirically analyze the relationship between risky asset allocation and background risk of Chinese residents.
Abstract
Purpose
The purpose of this paper is to empirically analyze the relationship between risky asset allocation and background risk of Chinese residents.
Design/methodology/approach
Using Chinese macroeconomic data, this study uses numerical method to solve dynamic stochastic optimal problem.
Findings
When risk of labor income is considered, ratio of risky asset declines with rising of age for those people with same age and wealth state; any of the following situations will lead to lower risky assets holdings: lower labor income growth expectations, higher labor income risk or higher labor and financial market covariance risk.
Research limitations/implications
This study uses real economy investment return as a proxy of risky asset return.
Practical implications
Residents with higher background risks should hold less risky assets, and overcome home‐bias problem during asset allocation.
Originality/value
This study takes two kinds of background risk into consideration: labor income risk, and covariance between labor income and risk asset.