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Borrowing Constraints, Portfolio Choice, and Precautionary Motives

  • Michael Haliassos
  • Christis Hassapis
Part of the Applied Optimization book series (APOP, volume 74)

Abstract

The effects of the type and tightness of borrowing constraints on wealth accumulation and on portfolios are examined. The unconstrained and constrained behavior when borrowing limits are based on labor income or on asset holdings of the household are compared, and the effects of varying the tightness of such limits are examined. Credit market conditions, as reflected in the tightness of borrowing constraints, can have serious effects on portfolio composition. Constraints can reduce or eliminate effects of earnings risk on wealth holdings. They can also reverse effects of risk aversion and of earnings risk on stockholding relative to those predicted by models that abstract from such constraints. As a result, samples contaminated with borrowing-constrained households will tend to underplay or even reverse the impact of risk aversion and of earnings risk expected on the basis of unconstrained models. The analysis suggests caution in basing sample splits on observed asset holdings, and in interpreting the failure of empirical studies to uncover sizeable precautionary effects on wealth and on portfolios.

Keywords

Precautionary saving borrowing constraints household portfolios 

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Copyright information

© Springer Science+Business Media Dordrecht 2002

Authors and Affiliations

  • Michael Haliassos
    • 1
  • Christis Hassapis
    • 1
  1. 1.University of Cyprus and HERMESCyprus

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