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American households have received a triple dose of bad news since the beginning of the current recession: The greatest collapse in asset values since the Great Depression, a sharp tightening in credit availability, and a large increase in unemployment risk. We present measures of the size of these shocks and discuss what a benchmark theory says about their immediate and ultimate consequences. We then provide a forecast based on a simple empirical model that captures the effects of wealth shocks and unemployment fears. Our short-term forecast calls for somewhat weaker spending, and somewhat higher saving rates, than the Consensus survey of macroeconomic forecasters. Over the longer term, our best guess is that the personal saving rate will eventually approach the levels that preceded period of financial liberalization that began in the late 1970s. Classification: C61, D11, E24
This paper provides a joint analysis of household stockholding participation, stock location among stockholding modes, and participation spillovers, using data from the US Survey of Consumer Finances. Our multivariate choice model matches observed participation rates, conditional and unconditional, and asset location patterns. Financial education and sophistication strongly affect direct stockholding and mutual fund participation, while social interactions affect stockholding through retirement accounts only. Household characteristics influence stockholding through retirement accounts conditional on owning retirement accounts, unlike what happens with stockholding through mutual funds. Although stockholding is more common among retirement account owners, this fact is mainly due to their characteristics that led them to buy retirement accounts in the first place rather than to any informational advantages gained through retirement account ownership itself. Finally, our results suggest that, taking stockholding as given, stock location is not arbitrary but crucially depends on investor characteristics. JEL Classification: G11, E21, D14, C35
We estimate the effect of pension reforms on households' expectations of retirement outcomes and private wealth accumulation decisions exploiting a decade of intense Italian pension reforms as a source of exogenous variation in expected pension wealth. The Survey of Household Income and Wealth, a large random sample of the Italian population, elicits expectations of the age at which workers expect to retire and of the ratio of pension benefits to pre-retirement income between 1989 and 2002. We find that workers have revised expectations in the direction suggested by the reform and that there is substantial offset between private wealth and perceived pension wealth, particularly by workers that are better informed about their pension wealth. Klassifikation: E21, H55
Several recent studies have addressed household participation in the stock market, but relatively few have focused on household stock trading behavior. Household trading is important for the stock market, as households own more than 40% of the NYSE capitalization directly and can also influence trading patterns of institutional investors by adjusting their indirect stock holdings. Existing studies based on administrative data offer conflicting results. Discount brokerage data show excessive trading to the detriment of stockholders, while data on retirement accounts indicate extreme inactivity. This paper uses data representative of the population to document the extent of household portfolio inertia and to link it to household characteristics and to stock market movements. We document considerable portfolio inertia, as regards both changing stockholding participation status and trading stocks, and find that specific household characteristics contribute to the tendency to exhibit such inertia. Although our findings suggest some dependence of trading directly-held equity through brokerage accounts on the performance of the stock market index, they do not indicate that the recent expansion in the stockholder base and the experience of the stock market downswing have significantly altered the overall propensity of households to trade in stocks or to switch participation status in a way that could contribute to stock market instability. JEL Classification: G110, E210
We provide explicit solutions to life-cycle utility maximization problems simultaneously involving dynamic decisions on investments in stocks and bonds, consumption of perishable goods, and the rental and the ownership of residential real estate. House prices, stock prices, interest rates, and the labor income of the decision-maker follow correlated stochastic processes. The preferences of the individual are of the Epstein-Zin recursive structure and depend on consumption of both perishable goods and housing services. The explicit consumption and investment strategies are simple and intuitive and are thoroughly discussed and illustrated in the paper. For a calibrated version of the model we find, among other things, that the fairly high correlation between labor income and house prices imply much larger life-cycle variations in the desired exposure to house price risks than in the exposure to the stock and bond markets. We demonstrate that the derived closed-form strategies are still very useful if the housing positions are only reset infrequently and if the investor is restricted from borrowing against future income. Our results suggest that markets for REITs or other financial contracts facilitating the hedging of house price risks will lead to non-negligible but moderate improvements of welfare.
We investigate US households’ direct investment in stocks, bonds and liquid accounts and their foreign counterparts, in order to identify the different participation hurdles affecting asset investment domestically and overseas. To this end, we estimate a trivariate probit model with three further selection equations that allows correlations among unobservables of all possible asset choices. Our results point to the existence of a second hurdle that stock owners need to overcome in order to invest in foreign stocks. Among stockholders, we show that economic resources, willingness to assume greater financial risks, shopping around for the best investment opportunities all increase the probability to invest in foreign stocks. Furthermore, we find that households who seek financial advice from relatives, friends and work contacts are less likely to invest in foreign stocks. This result corroborates the conjecture by Hong et al. (2004) that social interactions should discourage investment in foreign stocks, given their limited popularity. On the other hand, we find little evidence for additional pecuniary or informational costs associated with investment in foreign bonds and liquid accounts. Finally, we show that ignoring correlations of unobservables across different asset choices can lead to very misleading results.
The theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption, not just about its conditional mean. In the paper, we study the empirical transition matrix of consumption using a panel drawn from the Bank of Italy Survey of Household Income and Wealth. We estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution. The transition matrix generated by our estimates matches remarkably well the empirical matrix, both in the aggregate and in samples stratified by education. Our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis. Klassifikation: D52, D91, I30
We review savings trends in Italy, summarizing available empirical evidence on Italians’ motives to save, relying on macroeconomic indicators as well as on data drawn from the Bank of Italy’s Survey of Household Income and Wealth from 1984 to 2004. The macroeconomic data indicate that households’ saving has dropped significantly, although Italy continues to rank above most other countries in terms of saving. We then examine with microeconomic data four indicators of household financial conditions: the propensity to save, the proportion of households with negative savings, the proportion of households with debt, and the proportion of households that lack access to formal credit markets. By international comparison, the level of debt of Italian households and default risk are relatively low. But in light of the deep changes undergone by the Italian pension system, the fall in saving is a concern, particularly for individuals who entered the labor market after the 1995 reform and who have experienced the largest decline in pension wealth. JEL Classification: D91
Household saving behavior : the role of literacy, information and financial education programs
(2007)
Individuals are increasingly in charge of their own financial security after retirement. But how well-equipped are individuals to make saving decisions; do they possess adequate financial literacy, are they informed about the most important components of saving plans, do they even plan for retirement? This paper shows that financial illiteracy is widespread among the US population and particularly acute among specific demographic groups, such as those with low education, women, African-Americans and Hispanics. Moreover, close to half of older workers do not know which type of pensions they have and the large majority of workers know little about the rules governing Social Security benefits. Lack of literacy and lack of information can affect the ability to save and to secure a comfortable retirement; few individuals rely on the help of financial advisors and ignorance about basic financial concepts can be linked to lack of retirement planning and lack of wealth. Financial education programs can help improve saving and financial decision-making, but much more can be done to improve the effectiveness of these programs. JEL Classification: D91
We investigate, using the 2002 US Health and Retirement Study, the factors influencing individuals’ insecurity and expectations about terrorism, and study the effects these last have on households’ portfolio choices and spending patterns. We find that females, the religiously devout, those equipped with a better memory, the less educated, and those living close to where the events of September 2001 took place worry a lot about their safety. In addition, fear of terrorism discourages households from investing in stocks, mostly through the high levels of insecurity felt by females. Insecurity due to terrorism also makes single men less likely to own a business. Finally, we find evidence of expenditure shifting away from recreational activities that can potentially leave one exposed to a terrorist attack and towards goods that might help one cope with the consequences of terrorism materially (increased use of car and spending on the house) or psychologically (spending on personal care products by females in couples).