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Appears in Collections:Economics Working Papers
Peer Review Status: Unrefereed
Title: Equity Fund Ownership and the Cross-Regional Diversification of Household Risk
Author(s): Becker, Sascha
Hoffmann, Mathias
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Citation: Becker S & Hoffmann M (2008) Equity Fund Ownership and the Cross-Regional Diversification of Household Risk. Stirling Economics Discussion Paper, 2008-25.
Keywords: consumption risk sharing
regional home bias
Survey of Household Income and Wealth
labor income risk
portfolio choice
stock market participation
JEL Code(s): F36
Issue Date: Nov-2008
Series/Report no.: Stirling Economics Discussion Paper, 2008-25
Abstract: We explore the link between portfolio home bias and consumption risk sharing among Italian regions using aggregated household level information on consumption, income and portfolio holdings. We propose to use data on equity fund ownership to proxy for regional home bias: equity funds are typically diversified at the national or international level and will therefore provide interregional diversifiation. In assessing the impact of equity fund ownership on interregional risk sharing we distinguish between two dimensions: variation in the share of equity funds in fund-holder's wealth (the intensive margin) and variation in the fraction of households that hold funds (the extensive margin). We find that equity fund ownership is an important determinant of interregional risk sharing. First, diversification incentives qualitatively line up with actually observed portfolio choices: fund holders in regions where households are particularly exposed to region-specific labor income risk hold a larger fraction of their wealth in (out-of-region) funds. Secondly, for a region as a whole, risk sharing increases in both the intensive and the extensive margins of diversification and the two margins reinforce each other. The marginal effect of wider equity fund participation seems particularly strong, suggesting that policies aimed at increasing equity market participation could help foster better interregional risk sharing.
Type: Working or Discussion Paper
Affiliation: Economics
University of Zurich

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