Household Finance Risk Management

The so called"financial risk", refers to the possibility of lost which is caused by changes in various factors of uncertainty among all the economic agents in financial activities. There are many kinds of financial risks. The major ones are foreign exchange risk, interest rate risk, credit risk, the purchasing power of currency risk, liquidity risk, market price of securities, as well as country risk and other risks.Finance is the core of modern economic and financial activities has become increasingly widespread penetration into all aspects of social and economic life. However, financial risks are combined with the economic activities, even the individuals can't be excluded from their influnce. In recent years, in the United States, as the most developed domestic financial practices country, there are some researchers starting comparing the financial proposal of systemic family finance (Household Finance), which including related concepts about financial risk management for families.Compared with company financial risks management, the household finance has its unique research pattern. First of all, household financial problems are much more complicated. Family needs to make financial planning for a long term within a limited budget; each family has non-tradable assets like human resources; every family has non-liquid assets such as houses; debt constraints various in families as well as complex tax evasion goals. Second, considering about the rising portion that families share in the capital market, classic family financial behavior show much importance to the capital market. As a result, in the real economic world, individual investors need one theory that can help them make vise choices of reasonable financial tool that can assure their property income as well as avoid financial risks. The individual-focusing theory can help minimize the impact that brought by Macro markets, financial markets, as well as incidents of family life-cycle sustainability. With a combination of theory and practice, this paper expands the theory of multiple portfolio selection, intertemporal utility and risk management. It build up a risk control and risk optimizing model which includes individual short sight and long term investment perspective that capture the predictability of history of Chinese financial market's Return on Assets by using state space and VAR(1) model with actual financial market data from 2003 to 2008.In this thesis, case study is made with the extension in traditional financial assets choosing theory and risk managements. Firstly, unlike the traditional assumption, this thesis focuses on non financial market risks that individual meets in his life span. Combined with traditional Portfolio Theory, it shows that different families need different portfolio, even with one specific family, it requires different portfolio for different stages as its key point of assets managing and goal changes with time. Secondly, this thesis emphases on the impact of investment time limit in household finance. It shows that with Mean reversion, individual investors can choose different strategies when doing short sight and long term investments so as to simplify the investment activities. Thirdly, this model introduces individual choice variables which allow easy personalizing and adjusting. It has certain practical value for allowing individual activities such as risk prevent, circumvent, decentralization, control, transfer and compensation under a flexible framework.Because the time and strength limits, there are still some parts that need to improve. First of all, not enough points in the raw data which can lead to the extreme being overlooked in a long-term time series and affects the accuracy of the model. Secondly, in order to simplify the model analysis, a number of more stringent assumptions are selected which may cause biased conclusions. Finally, the model has a huge expansion space in the future, but it is not been fully carried out as the author's personal limites.