Three Essays on Household Finance.

Abstract

This dissertation studies household saving and investment decisions in a variety of circumstances. The first chapter of the dissertation investigates the effects of housing and labor income risk on household stock investment behavior. Housing market risk is geographically heterogeneous in that house price growth rate and its correlations with stock return and local labor growth rate vary across regions. In the presence of housing market risk, which is not easily diversifiable due to a special characteristic of houses as a residence, households adjust their stock share according to local housing market risk. Households in areas where the housing market risk is higher tend to respond by holding less stock in their portfolios, although this tendency weakens after retirement when labor income risk disappears. This finding suggests that housing market risk exerts more influence on household portfolio choice when it is combined with labor income risk. In the second chapter, the effect of retirement on portfolio choice is examined. The conventional wisdom suggests that, when labor income is reduced, households should hold more safe assets in their portfolios after retirement. However, little theoretical consensus has been reached and empirical evidence has been scarce to evaluate this argument. This chapter provides empirical evidence that the retirement has a causal effect on portfolio choice. The household level panel data and the instrumental variable approach are used to deal with endogeneity problem and identify the effect of retirement. The result shows that the retirement causes a 5-7 percent increase in risky shares in portfolios. The third chapter examines the cash-out mortgage refinancing behavior and its effect on portfolio rebalancing. Owing to the mortgage market expansion and low mortgage interest rate in the early 2000s, households cashed out a large amount of home equity. Cashed-out households reduce their home equity actively, thus rebalancing their portfolios. This rebalancing effect, however, is offset due to aggressive investments in other real estate. As households increased their real estate holdings using cashed-out home equity, they enjoyed a greater leveraging effect in real estate investment during the booming housing market, while household portfolios became more vulnerable to housing market risk.