Research Of Allocation Of Household Financial Assets Based On Life Cycle And Background Risk

The selection and allocation of assets in an investor’s portfolio is a very important issue in finance.Modern portfolio theory(MPT),pioneered by Harry Markowitz(1952),studies how families can diversify their allocation of assets in the securities market,thus spreading risk and realizing optimal returns.But MPT has three drawbacks.Firstly,assets in MPT are limited to those in the securities market.But in practice,a portfolio usually includes not only securities but also real estate and financial products,among which real estate is the most important.Secondly,MPT assumes that investors only face the risk of price fluctuations in the financial market,referred to as financial risk or portfolio risk.In reality,investors often face many other non-financial risks such as income risks,health risks and risks of holding real estate,etc.Since these risks are hard to be spread through asset allocation,they are referred to as background risks.Thirdly,classical portfolio models,such as CAPM and C-CAPM are all simple two-period models.Although Samuelson(1969)and Merton(1969)extended the models throughout an investors life cycle,they are under a series of very strict assumptions.In reality,these assumptions usually do not apply,because investors consider maximizing the utility of their entire life cycles,thus besides facing the behavioral decisions of financial asset allocation they also face many non-financial decisions such as educational decisions and fertility decisions,which are also bound to have significant impacts on investors’ portfolio allocation.Therefore,the study of the influence of background risks on asset allocation throughout the life cycle of an investor carries great significance.Since Pratt and Zeckhauser(1987),foreign scholars have been conducting theoretical researches and empirical analysis on asset allocation in relation to background risks,and domestic scholars have currently started to conduct relevant researches as well,though their work is restricted due to limited data.By leveraging my long-time experience in personal financial planning and the data acquired in personal financial business management,and in light of the analysis above,this article focuses on the research of household investors’ portfolio allocation based on their life cycles and background risks,and firstly,conduct a thorough retrospective analysis on domestic and foreign relevant studies of recent years;secondly,construct analytic theoretic models and conduct numerical dynamic simulation studies;thirdly,on the basis of client data of one large-scale commercial bank during a 4-year period,conduct empirical analysis on clients’ asset allocation behaviors,which includes two sections:one is analyzing the probability and amount of acquiring a certain type of household asset using a regression model;the other is analyzing the overall condition of clients’ portfolio and classifying clients using cluster analysis.The main research results and innovations in this article include the following aspects:1.Construction and analysis of theoretical models.Starting from the most classic consumption utility function model,the article researches on the allocation of financial assets throughout household investors’ entire life cycle.In order to conveniently research,the simplified model divides household investors’ assets into two categories:risk-free assets and risk assets.In addition,categorize the entire life cycle of household investors according to Chinese households’ actual situations,and use numerical dynamic simulation to analyze the impact of background risks on allocation of household financial assets throughout their entire life cycle.2.Empirical analysis of household financial asset allocation behaviors.Innovation of this article is based on the data advantages of a large-scale commercial bank,it does not only analyzes households’ involvement in the securities,but also analyzes other types of asset allocation behaviors.The empirical study of household asset allocation of this paper mainly consists of two aspects:one is analyzing whether the client possesses a certain type of asset and the influencing factors with the Probit model;the other is analyzing the amount and influencing factors of a certain type of asset possessed by the client with the Tobit model.Based on the panel data of the commercial bank’s clients’ asset allocation during a 4-year period,this article analyses clients’ participation and depth of participation in asset markets including stocks,bonds and funds respectively,and analyzes the impact of mortgage risk and income risk on the allocation of households’ financial assets,resulting in abundant conclusions.3.Feature analysis of household financial assets allocation.This part of the analysis focuses on the overall configuration of household portfolios,classify all clients according to the structural features of their household portfolios,and furthermore analyze features of different types of clients according to the life-cycle effect and background risk factors,thus provide appropriate guidance and assistance to banks’marketing of specific products.Specifically,apply the asset allocation of six types of assets----stocks,deposits,funds,bonds,gold and financial products----as input variables,and classify the sample clients into six categories through cluster analysis:conservative and prefer deposits,steady and progressive,prefer hybrid allocation,wealth pursuing,risk preferring,steady and defensive;then further analyze the basic data features and asset allocation behavior features of each different category of clients,thus provide guidance and assistance to banks’ product marketing.4.Policy suggestions.This article combines the research result of theoretical model analysis and empirical analysis to propose policy and strategic suggestions for the government,financial institutions and household clients.When the government formulates policies,it should consider the background risks residents are facing,and strive to reduce residents’ three major background risks----income risk,estate risk and health risk.Financial institutions should consider residents’ life cycle and other background risk features when designing and marketing their financial products.Residents themselves should take their life cycle and background risks into consideration when allocating their assets,so that their asset allocation would be more reasonable and scientific.5.Research prospect.Future research can be conducted and strengthened from the following aspects.Firstly,include estates and household health conditions into the models’ asset allocation,in order to explore household investors’ asset allocation features and the influencing mechanism of background risks in a more comprehensive and detailed manner.Secondly,in the empirical analysis,expand data of the research sample,especially detailed data of clients’ estate.Thirdly,conduct more in-depth research of the dynamic changing features of residents’investment behaviors.