Twin Picks: Disentangling the Determinants of Risk-Taking in Household Portfolios

Abstract

This paper investigates the determinants of financial risk-taking in a panel containing the asset holdings of Swedish twins. We measure the impact on risk-taking of a broad set of demographic, financial, and portfolio characteristics, and use yearly twin pair fixed effects to control for genes and shared background. We report a strong positive relation between risky asset market participation and financial wealth. Among participants, the average financial wealth elasticity of the risky share is significantly positive and estimated at 22%, which suggests that the average individual investor has decreasing relative risk aversion. Furthermore, the financial wealth elasticity of the risky share itself is heterogeneous across investors and varies strongly with characteristics. The elasticity decreases with financial wealth and human capital, and increases with habit, real estate wealth and household size. As a consequence, the elasticity of the aggregate demand for risky assets to exogenous wealth shocks is close to, but does not coincide with, the elasticity of a representative investor with constant relative risk aversion. We confirm the robustness of our results by running time-differenced instrumental variable regressions, and by controlling for zygosity, lifestyle, mental and physical health, the intensity of communication between twins, and measures of social interactions.

Formative Experiences and Portfolio Choice: Evidence from the Finnish Great Depression

“…1 Bertaut and Starr-McCluer (2002), Calvet, Campbell, and Sodini (2007), Curcuru et al (2010), Guiso and Sodini (2013), Haliassos and Bertaut (1995), and Heaton and Lucas (2000) document portfolio heterogeneity. Barnea, Cronqvist, and Siegel (2010), Cesarini et al (2010), and Calvet and Sodini (2013) use register-based twin data to analyze the determinants of portfolio choice. 2 During the 2007 to 2009 Great Recession, approximately one in six workers in the U.S. labor force experienced a job loss (Farber (2011)).…”

“…These papers point to experiences as a catch-all explanation for the remaining variation, whereas our paper measures specific experiences and investigates their impact on portfolio choice. The focus on labor market conditions and their long-term impact also sets our paper apart from Calvet and Sodini (2013), who use a twin design to estimate the relation between wealth and risky investment.…”

Inequality and Aggregate Demand in the Is‐lm and Is‐mp Models

“…Without further information on the magnitude of α and γ , the responses of the IS and LM curves to a change in income inequality is unknown. However, as noted above, Carroll (1998), Dynan et al (2004), and Carvalho and Rezai (2016) present evidence that α > 1, and Carroll (2000), Calvet and Sodini (2014), Fujiki andHsiao (2008), andTin (2008) present evidence that γ < 1. As such, one would expect an increase in income inequality to shift the IS curve in and the LM curve out, as the average marginal propensity to save increases on the one hand, and average liquidity preference decreases on the other.…”

“…To fix intuition, one would expect γ to be less than one, i.e., one would expect richer households to maintain lower ratios of cash to income than poorer households. Carroll (2000) and Calvet and Sodini (2014) present evidence that wealthier households tend to hold riskier assets, which may be interpreted as supporting evidence for γ < 1. More direct support for this hypothesis is provided in Fujiki and Hsiao (2008) and Tin (2008), which provide evidence for an income elasticity of money demand between zero and one by estimating money demand functions on cross-sectional data.…”

Who Are the Value and Growth Investors?

“…We further verify that our results are unlikely to be due to investor experience or stock characteristics other than the value loading, such as professional proximity, the dividend yield, taxes, firm age, skewness, and size. As in Calvet and Sodini (2014), we use a subsample of Swedish twins to control for latent investor fixed effects, such as family background, upbringing, inheritance, or attitudes toward risk. The sensitivities of the value loading to socioeconomic characteristics are similar in the twin subsample as in the general household population, regardless of whether the twins communicate frequently with each other.…”