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Ambiguity Aversion and Household Portfolio Choice Puzzles: Empirical Evidence

By S.G. (Stephen) Dimmock, R.R.P. (Roy) Kouwenberg, O.S. (Olivia) Mitchell and K. (Kim) Peijnenburg

Abstract

We test the relation between ambiguity aversion and five household portfolio choice puzzles: nonparticipation in equities, low allocations to equity, home-bias, own-company stock ownership, and portfolio under-diversification. In a representative US household survey, we measure ambiguity preferences using custom-designed questions based on Ellsberg urns. As theory predicts, ambiguity aversion is negatively associated with stock market participation, the fraction of financial assets in stocks, and foreign stock ownership, but it is positively related to own-company stock ownership. Conditional on stock ownership, ambiguity aversion is related to portfolio under-diversification, and during the financial crisis, ambiguity-averse respondents were more likely to sell stocks

Topics: Ambiguity aversion, Stock market participation, Household portfolio puzzles, Home-bias, Own-company stock puzzle, Portfolio under-diversification, Household finance, Financial literacy
Year: 2016
DOI identifier: 10.1016/j.jfineco.2016.01.003
OAI identifier: oai:repub.eur.nl:80063

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