Portfolio selection by households: an empirical analysis using dynamic panel data models

Keywords: portfolio selection; household survey; dynamic GMM; portfolio selection mechanism; relative risk aversion; financial literacy.
  • 17 Julio 2017

Por Yuichiro Ito, Yasutaka Takizuka y Shigeaki Fujiwara

Bank of Japan, Working Paper No.17-E-6 (June 2017).


This paper investigates the mechanisms that influence household portfolio selection using Japanese and US household survey data, based on dynamic panel data models. The results show that as the classical portfolio theory indicates, the expected value of excess return on risky assets, market volatility, and relative risk aversion are important factors in household portfolio selection, for both Japanese and US households. Moreover, entry costs such as financial literacy have an indispensable effect, as well as households’ various constraints, including liquidity and precautionary saving motives. Next, we examine the difference in household portfolio selection between Japan and the USA to explore the reasons why Japanese households have a cautious investment stance. The results indicate that the difference is partly explained by the differences in the relationships between risks and return in the market along with concerns about the future, but financial literacy and structural factors are also important determinants. This suggests that further improvements in institutional aspects and an increase in financial knowledge, as well as an improvement in market performance and the mitigation of future concerns, are important factors in making investment environments in Japan more attractive.

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