Precautionary Saving, Financial Risk, and Portfolio Choice

Authors


  • Note: The author acknowledges the financial support provided by the Regione Autonoma della Sardegna, “Master and Back” research grant.

Correspondence to: Manuela Deidda, Centre for North South Economic Research (CRENoS), Via S. Giorgio 12, 09124 Cagliari, Italy (manuela.deidda@crenos.unica.it).

Abstract

Relying on a direct question about the desired amount of precautionary wealth from the 2002 wave of the Italian “Survey of Household Income and Wealth,” I assess the main determinants of the precautionary motive for saving, focusing on the role played by financial risk on households' saving decisions. Households that invest mainly in safe assets do not need to protect themselves against future and unexpected financial losses. Consequently, once we control for households' sources of risk beside financial ones, the amount of precautionary savings of a household investing exclusively in safe assets should be lower compared to households who detain a non-negligible share of risky assets in their portfolio. Results show that, as expected, a strong and negative correlation exists between the desired amount of precautionary wealth and the ownership of a portfolio made exclusively of safe assets.

Ancillary