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Portfolio allocation and borrowing constraints

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journal contribution
posted on 2024-04-19, 13:12 authored by Raslan Alzuabi, Sarah Brown, Daniel Gray, Mark N Harris, Christopher SpencerChristopher Spencer

Using the US Survey of Consumer Finances, we explore the empirical relationship between borrowing constraints and financial portfolio allocation by American households. To help motivate our empirical analysis we initially draw insights from a mean-variance model of optimal portfolio allocation with three tradable asset classes defined by increasing risk, and establish a link between borrowing restrictions and portfolio allocation in the presence of background risk. Our main contribution, however, lies in estimating the role that borrowing constraints play in shaping households' financial portfolio allocation. This is achieved using an ordered fractional probit model. In addition to revealing the significant empirical role played by household borrowing constraints in determining portfolio allocation, our analysis helps us to resolve ambiguity surrounding the behaviour of the medium-risk asset in our motivational theoretical framework. Further, the empirical distribution of medium-risk assets is found to be remarkably similar to that for high-risk assets, suggesting the presence of a more general ‘risk puzzle’, which our borrowing constraints measures partially explain.

History

School

  • Loughborough Business School

Published in

The European Journal of Finance

Volume

30

Issue

9

Pages

915-948

Publisher

Informa UK Limited, trading as Taylor & Francis Group

Version

  • VoR (Version of Record)

Rights holder

© The Author(s)

Publisher statement

This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited, and is not altered, transformed, or built upon in any way.

Acceptance date

2023-07-18

Publication date

2023-08-24

Copyright date

2023

ISSN

1351-847X

eISSN

1466-4364

Language

  • en

Depositor

Dr Christopher Spencer. Deposit date: 5 September 2023

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