theory suggests that with increasing labor income risk, the reluctance of households to hold stocks increases. We propose to … measure income risk as the observed variation of household income over a five year period. We find that indeed higher income … risk reduces the propensity to invest in stocks. However, when controlling for household heterogeneity as well as …

Households face earnings risk which is non-normal and varies by age and over the income distribution. We show that … assets. Because households are subject to more background risk than previously considered, the estimated model implies a … substantially lower coefficient of risk aversion. We also find renewed support for rule-of-thumb investment strategies under the …