Theoretical And Empirical Research Of The Impact Of Background Risk On Asset Allocation

The introduction of background risk factors in asset allocation has garnered sustained attention of academic and industrial circles.This paper studies the impact of background risks on asset allocation through theoretical and empirical research.In this paper,the impact of "additive" and "multiplicative" background risk on asset allocation has been investigated by constructing theoretical models within the framework of both expected utility theory and mean variance utility theory.This study shows that in both models,once the risk premium is independent with the background risk's yield,the amount of risky asset investment is positive.Within the framework of expected utility theory,theoretical model of "additive" background risk reveals that if the risk premium and marginal utility of background risk are positively or low negatively correlated,the amount of investment is positive.Whereas some factors like the initial asset's size and risk aversion coefficient should also be included in the "multiplicative" background risk theoretical model.Within the framework of mean variance utility theory,the theoretical model of "additive" background risk shows that the relationship between the amount of risky assets invested and other parameters such as risk premium and asset variance depends on whether the utility function meets the decreasing absolute risk aversion and risk vulnerability.The theoretical model of "multiplicative" background risk could be analyzed in the same way as "additive" theoretical model.Utilizing an individual investor survey in Yangtze River Delta region of China in 2010,this paper introduces background risk factors such as entrepreneurship,stability of income,economics and management major for the first time.Then this paper investigates the effects of background risk factors on participation in risky assets through probit model.The study shows that good health can promote participation in risky assets,but the effect is not significant.Medical security promotes participation in risky assets.Real estate investment slightly reduces participation in risky assets,but the impact is not significant.Risk aversion exerts insignificant positive effect.Liquidity constraints can promote participation in risky assets significantly.Human capital has significant positive and quadratic impacts on participation in risky assets.Employment does not have many impacts on participation in risky assets.Specifically,couple employment and sector employment exerts insignificant negative and positive effect.Entrepreneurship's effect is not robust and significant.Stability of income exerts significant positive effect.Gender,education and financial wealth do not have significant impact on participation in risky assets.Economics and management major exerts significant positive effect.Age promotes participation in risky assets significantly.But when age exceeds 65,participation will decline.Our theoretical and empirical findings provide many policy implication.