2009 March 02

Jours fixes take place on the first monday of the month, starting at 5:00 p.m., in the House of Finance (Campus Westend).

[Valentin Braun, E-Finance Lab]

This paper discusses the effect of background risks, namely labor  income and housing, using a Mean-Co-Lower-Partial-Moment (CLPM) approach that allows the consideration of background risk, in the  light of the heavily debated stock market participation puzzle. The  major advantage of the Mean-CLPM approach is the possibility to  consider all information endorsed in a return distribution of a  specific asset class, particular skewness and (fat) tails. In order to  apply the Mean-CLPM approach we construct time-series data on  financial assets, labor income and housing and derive optimal asset allocations. In general the portfolios derived by the Mean-CLPM  approach exhibit a markedly lower equity shares compared to a  traditional Mean-Variance approach. Contrasting the findings of both  approaches with real German household portfolios shows that for the  average household the deviation between theoretically optimal and empirically observed equity shares are 50% lower (better) using the  Mean-CLPM than using the Mean-Variance approach. Additionally, the  number of non-participation recommendations is notably higher applying  the Mean-CLPM approach.