When households and other investors face imperfect financial markets and individualized shocks, how do they adjust consumption, investment, and positions in different types of financial assets? Neoclassical macro models assume that financial markets are complete and thus cannot provide an answer to this question
However, this issue has important practical significance for individual family decision-making, and also has strong reference value for public insurance policies and related tax adjustment policies
Yicheng Wang, Assistant Professor of Economics at Peking University HSBC Business School, and his collaborators Professor Yongsung Chang and Jay Hong of Seoul University, South Korea, Marios Karabarbounis, Senior Economist at Richmond Fed, and Tao Zhang, Senior Economist at the University of Oslo, in a recent paper A new empirical and quantitative analysis of this issue is presented in " Income Volatility and Portfolio Choices
" (Income Volatility Shocks and Portfolio Allocation) .
The paper was officially published in Review of Economic Dynamics (Volume 44, April 2022, Pages 65-90)
Review of Economic Dynamics is a quarterly peer-reviewed academic journal published by Elsevier on behalf of Society for Economic Dynamics
In the study, the authors collected official Norwegian government tax data over the past 30 years, wealth data, labor market employer-employee matching data, and financial market investment data, to construct information about household income, wealth, and the different components of wealth, Using panel data of specific information on consumption and labor market, and using a series of measurement tools such as instrumental variable analysis and double-difference analysis, the causal relationship between the individual fluctuation shock of labor income and risk assets is studied
On the basis of matching a series of characteristic facts, the authors construct a quantitative structure model based on heterogeneous micro-agents and conduct counterfactual analysis
The benchmark model can predict the relationship between household income volatility and risky financial assets well, which is highly consistent with the empirical analysis
Research shows that when individual income risk doubles, households reduce risky financial assets by 5%
The quantitative structure model analysis shows that if the individual income risk of a family can be stabilized due to policies and does not change over time, social welfare will increase by about 4%; if the family cannot freely adjust the financial asset position, social welfare will lose about 1%
The paper makes three contributions to the study of income volatility shocks
First of all, the sample size of household consumption investment survey data used in the study is rich, and the empirical results are relatively consistent and convincing
Secondly, a new quantitative structural model is constructed, which includes elements such as limited life cycle, individual income volatility shocks, and incomplete financial markets, and creatively introduces Idiosyncratic volatility shocks, that is, shocks for second-order moments.
, and calibrated and estimated this structural model
Finally, the article also conducts a welfare analysis of different households, and how the progressive income tax system affects the choice of different financial assets by different households
Wang Yicheng, Assistant Professor at Peking University HSBC Business School, Ph.
in Economics from the University of Rochester, USA.
His main research fields are empirical and quantitative macroeconomics, heterogeneous economic agents and entrepreneurial behavior .
He has published many papers in internationally renowned journals such as Dynamics
, and is participating in research projects such as the National Natural Science Foundation of China .