Household portfolios and monetary policy

We show that expansionary monetary policy is associated with higher household portfolio allocation to high risk assets and lower allocation to low risk assets, in line with “reaching for yield” behaviour. Our findings are based on analysis of US household level panel data using two measures of monetary policy shifts over the period 1999-2007. We also show that the impact of monetary policy changes is stronger for active investors. In addition, our hurdle model estimates reveal that monetary shocks strongly affect the decision to hold high risk assets, but not the decision to hold low risk assets. Finally, our results highlight the role of self-reported risk attitudes as well as that of mortgage-holder status in affecting the response of household portfolios to monetary policy changes

Modelling the composition of household portfolios: a latent class approach

We introduce the latent class modelling approach to the analysis of financial portfolio diversification at the household level. We explore portfolio allocation in Great Britain using household panel data based on a nationally representative sample of the population, namely the Wealth and Assets Survey. The latent class aspect of the model splits households into four groups, which serves to unveil a more detailed picture of the determinants of portfolio diversification than existing econometric approaches. Our findings reveal a pattern of class heterogeneity that conventional econometric models are unable to identify as the statistical significance as well as the direction of the effect of some explanatory variables varies across the four classes. When comparing our preferred latent class estimator to the commonly used approaches, we find that treating the population as a single homogeneous group may lead to biased parameter estimates and suggests that policy based on such models could be inappropriate or erroneous

Portfolio allocation and borrowing constraints

Using the US Survey of Consumer Finances, we explore the empirical relationship between borrowing constraints and financial portfolio allocation by American households. To help motivate our empirical analysis we initially draw insights from a mean-variance model of optimal portfolio allocation with three tradable asset classes defined by increasing risk, and establish a link between borrowing restrictions and portfolio allocation in the presence of background risk. Our main contribution, however, lies in estimating the role that borrowing constraints play in shaping households' financial portfolio allocation. This is achieved using an ordered fractional probit model. In addition to revealing the significant empirical role played by household borrowing constraints in determining portfolio allocation, our analysis helps us to resolve ambiguity surrounding the behaviour of the medium-risk asset in our motivational theoretical framework. Further, the empirical distribution of medium-risk assets is found to be remarkably similar to that for high-risk assets, suggesting the presence of a more general ‘risk puzzle’, which our borrowing constraints measures partially explain

Portfolio allocation and borrowing constraints

We explore the empirical relationship between borrowing constraints and household financial portfolio allocation. To motivate our analysis we develop a mean-variance model of portfolio allocation with three tradable asset classes defined by increasing risk, and establish a link between borrowing restrictions and financial portfolio allocation at the household level. Under non-restrictive assumptions the proportion of wealth allocated to the medium-risk asset is ambiguous. We also demonstrate that in the presence of both correlated background risk and borrowing constraints the domain of the non-binding risk-return space will be a function of background risk. We then analyse the US Survey of Consumer Finances with a view to empirically exploring the predictions of our theoretical framework. The distribution of medium-risk assets in US households is remarkably similar to that for high-risk assets, and suggests the presence of a more general ‘risk puzzle’, which our proxies for borrowing constraints partially explain. Our findings indicate that such constraints are inversely related to the proportion of financial wealth allocated to both high-risk and medium-risk assets, but are positively related to low-risk asset holdings. In light of our findings, further work aimed at accounting for the allocation of medium-risk assets in US households is considered expedient

The Risk-Taking Channel in the US: A GVAR Approach

Employing data from thirty large banks in the US, we examine banks' risk-taking behaviour in response to monetary policy shocks. Our investigation provides support for the presence of a risk-taking channel: banks' nonperforming loans increase in medium to long run following an expansionary monetary policy shock. We also find that banks' capital structure plays an important role in explaining bank's risk-taking appetite. Impulse response analysis shows that shocks emanating from larger banks spillover to the rest of the sector but no such effect is observed for smaller banks. The results are confirmed for banks' Z-score

Charitable behaviour and political affiliation: evidence for the UK

We explore the effect of political party alignment on the likelihood of undertaking charitable behaviour, as captured by making monetary donations and volunteering, as well as on the amount of money donated and the number of hours volunteered. Using data from the most recent large scale UK household longitudinal survey, this is one of the first studies to explore the relationship between political affiliation and charitable behaviour using panel data. Being affiliated to the Labour Party relative to being affiliated to the Conservative Party (the most right wing political party in our analysis) is negatively associated with both the probability of donating money to charity and the proportion of income donated to charity. In contrast, these effects are found to be positive in the case of the Liberal Democrats and the Green Party. With respect to volunteering, we find that, whilst affiliations with the Labour Party and the Liberal Democrats relative to being affiliated to the Conservative Party are negatively associated with the probability of being a volunteer, affiliations with the Labour Party and the Liberal Democrats are positively associated with the number of hours volunteered conditional on being a volunteer

Modelling the composition of household portfolios: a latent class approach

We explore portfolio allocation in Great Britain by introducing a latent class modelling approach using household panel data based on a nationally representative sample of the population, namely the Wealth and Assets Survey. The latent class aspect of the model splits households into four groups, from lowest-wealth and least-diversified through to highest-wealth and most-diversified, which serves to unveil a more detailed picture of the determinants of portfolio diversification than existing econometric approaches. A pattern of class heterogeneity is revealed that conventional econometric models are unable to identify as the statistical significance and the direction of the effect of some explanatory variables varies across the groups. For example, the effect of labour income on the number of financial assets held influences the level of diversification for the two middle classes, whereas no effect is found for households with the lowest or the highest levels of diversification. Noticeable differences in the magnitude of the effects of pension wealth and occupation are also revealed across the four classes. Such findings demonstrate the importance of accounting for latent heterogeneity when modelling financial behaviour. Ultimately, treating the population as a single homogeneous group may lead to biased parameter estimates, whereby policy based on such models could be inappropriate or erroneous