Systematic Income Risk and Households’ Portfolios

We develop a methodology to estimate households’ exposure to systematic income risk and its causal effect on portfolio decisions. The identification strategy relies on household fixed effects and a novel instrument based on major corporate events. We apply it to a Dutch administrative panel dataset that covers the Dutch population between 2005 and 2020. Our dataset includes employer-employee matches, detailed decomposition of income and wealth, and income expectations. We document substantial cross-sectional variation in systematic income risk. We find that households more exposed to business cycle fluctuations perceive their income as cyclical and hold safer portfolios