Labor Income And Asset Allocation Of China's Urban Households

In this thesis,I reviewed the relevant theoretical and empirical study of household finance and household asset allocation firstly.Based on the research of Campbell&Viceira(2002),I discussed household asset allocation model without considering labor income.I found that the optimal risk asset proportion is proportional to the expected excess return of the stock market and inversely proportional to the volatility of the stock market.Then I added labor income into the model and discussed the effect of risk-free labor income and risky labor income on household asset allocation respectively.Allowing for risk-free labor income,investors have risk-free and untradable human capital.Compared to those who have financial assets merely,they will invest more money to risk assets.The risk asset proportion will enlarge with the increase of H_t?W_t and tend to change in their life time.Meanwhile,it indicates a reversed investment strategy that the risk asset proportion will decrease when the stock market performs well.Allowing for risky labor income,we should consider both benefit and risk of human capital accumulated by labor income when analysing the optimal risk asset proportion.On one hand,investors'human capital will expand with the increase of expected labor income or expected labor income rate,which will have a positive effect on risk asset proportion.On the other hand,when the risk of human capital(or labor income risk)increase,investors should decrease their risk asset proportion.According to the data of China Household Finance Study(CHFS,2011),the paticipation rates of stock,derivatives,exchange and some other financial markets of Chinese families are 8.84%,0.05%and 1.10%.The risk asset holded by Chinese families is not diversified,which mainly in the form of stock.Based on the theoretical model,I tried to test the effect of labor income on Chinese urban household asset allocation.I used Probit model and Tobit model to analyse the effect of labor income on stock market paticipation of Chinese urban households with the data of CHFS,2011.The main findings are:1?The expected growth rate of labor income has a positive effect on stock market paticipation.2?The limited stock market paticipation and diversified propotion of stock holding is closely related to heterogeneous background risk.Labor income risk of Chinese urban household has a significant negative effect on stock market paticipation.Covariance risk of labor income of Chinese urban household has a negative effect on stock market paticipation,however,which is not significant on the significant level of 10%.3?The unemployment insurance which tend to reduce labor income risk promotes stock market paticipation significantly.Besides,home ownership has contributed significantly to the stock market participation and"wealth effect"of real estate investment is obvious.Besides,among the other facors that affect stock market paticipation,the relationship between the age of the head of a household and stock market participation is nonlinear,but inverse U-shaped,which means that"Life cycle effect"of Chinese households'financial investments is obvious.Years of education of the head of a household has significant positive impact on the stock market participation.Those heads of households who have more years of education and more stock market investment expertise have lower entry cost of participation in the stock market.Househlds in eastern regions of China are more likely to participate in the stock market than counterparts in the central and western region.