The literature on household finance establishes a framework to understand the portfolio choice of individuals. In the light of demographic transition this research proposal focuses on the health status of individuals and uses empirical data to understand how the health status itself and changes in this variable influence the portfolio choice. The key contribution of this research proposal is to characterize the health status of individuals using a newly available and previously unexploited measure. Instead of employing categorical variables, we introduce the subjective life expectancy as measure for the health status. This approach offers several advantages because it captures additional information such as an expectational component about the future health status. Using the self- reported health status this information was not considered although dynamic models clearly point at the influence of expectations on the household portfolio choice. To estimate the impact of
the health status on the portfolio choice of individuals we use the German SAVE dataset provided by the Mannheim Research Institute on the Economics of Aging.
Table of Contents
1 Introduction and Motivation
2 Theoretical Approach and Model
3 Data and Estimation Strategy
Ownership of different types of financial products (extensive margin)
Marginal holdings of risky assets conditional on ownership (intensive margin)
4 Conclusion and Policy Implications
Research Objectives and Themes
This research aims to investigate how changes in an individual's health status influence household portfolio choices. By moving beyond traditional categorical variables, the study proposes using "subjective life expectancy" as a more nuanced measure to capture expectation-based impacts on financial decision-making, utilizing data from the German SAVE dataset.
- Impact of health status on household financial asset allocation.
- Implementation of subjective life expectancy as a dynamic explanatory variable.
- Analysis of risk aversion and background risk in the context of health shocks.
- Empirical evaluation using longitudinal data from the German SAVE survey.
- Distinction between extensive margin (ownership) and intensive margin (holdings) in financial product choices.
Excerpt from the Book
1 Introduction and Motivation
The health status of individuals is seen as one candidate to explain the heterogeneity in household portfolio choice. Theoretical models and empirical findings from the United States of America show that the health status of individuals has an impact on the way how they invest their wealth (Edwards, 2008). The static analysis of data taken from the US Health and Retirement Survey and the Study of Assets and Health Dynamics Among the Oldest suggests that the health status of individuals can be taken as a determinant for the portfolio choice of households (Rosen and Wu, 2004) (Coile and Milligan, 2006). The dynamic analysis provides empirical findings which demonstrate that a change in the health status implies a significant change in the ratio between financial and non-financial assets but also affects the composition of the portfolio of risky assets (Berkowitz and Qiu, 2006).
One of the key features of previous research was to take the self- reported health status as explanatory variable into the regression model. This variable contains some basic information on how individuals self- assess their health status with respect to five categories. To identify changes in health status previous analyses rely on a change in this information and then construct a dummy variable if the health status had changed from one wave to the next.
Within this research proposal I suggest to use the subjective life expectancy as explanatory variable for the household portfolio choice. The main advantage behind this extension is the use of additional information that arises from expectations. So far we have only considered information about the health status that resulted in change of the observed variable health status. This neglects that household portfolio choice is a life cycle decision and can be modeled as a dynamic concept including expectations about future events (Merton, 1969).
Summary of Chapters
1 Introduction and Motivation: This chapter highlights the link between health status and financial behavior, proposing subjective life expectancy as a superior measure over traditional self-assessed health categories.
2 Theoretical Approach and Model: The chapter explores how health shocks influence risk aversion and consumption patterns, modeling them as sources of background risk that alter portfolio composition.
3 Data and Estimation Strategy: This section details the use of the German SAVE dataset and outlines empirical methodologies to analyze how health status impacts both the ownership and the quantity of financial assets held.
4 Conclusion and Policy Implications: The author summarizes the findings and discusses the relevance of the research for policy-making, particularly concerning the impact of demographic transitions and social security privatization on investment behavior.
Keywords
Household Portfolio Choice, Economics of Aging, Health Status, Subjective Life Expectancy, Risk Aversion, Financial Assets, Background Risk, SAVE Dataset, Life Cycle Decision, Investment Behavior, Demographic Transition, Econometric Modeling, Wealth Management.
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines how an individual's health status affects their household portfolio choices, focusing on the link between health-related expectations and financial asset allocation.
What are the primary themes discussed in this work?
Key themes include household finance, the impact of health shocks on risk aversion, the role of life expectancy in investment strategies, and the use of empirical data to model life-cycle portfolio decisions.
What is the primary research objective?
The goal is to replace traditional categorical health variables with "subjective life expectancy" to better capture how individual expectations regarding future health influence financial portfolios.
Which methodology is employed in this research?
The study uses longitudinal empirical analysis based on the German SAVE survey, employing various regression models, including Probit/Logit for ownership and fixed-effects models for asset holdings.
What topics are covered in the main body of the paper?
The main body covers the theoretical background of health-related risk, the empirical strategy for analyzing financial product ownership, and the intensive margin of risky asset holdings.
Which keywords define this research?
Core keywords include Household Portfolio Choice, Economics of Aging, Health Status, Subjective Life Expectancy, and Background Risk.
Why does the author prefer "subjective life expectancy" over self-reported health?
The author argues that subjective life expectancy incorporates forward-looking expectations, providing more detailed information that directly impacts dynamic life-cycle financial decisions.
What specific dataset does the author utilize?
The research relies on the German SAVE survey (Sparen und Altersvorsorge in Deutschland), provided by the Mannheim Research Institute on the Economics of Aging.
How is the "extensive margin" different from the "intensive margin" in this study?
The extensive margin refers to the decision of whether to own certain financial products, whereas the intensive margin refers to the specific amount or share of wealth invested in those products.
What are the practical policy implications suggested by the author?
The author suggests that understanding the impact of health on portfolios is crucial for evaluating policies like the privatization of social security, as individuals with poorer health might shift to safer, less optimal portfolios.
- Quote paper
- Moritz Meyer (Author), 2009, Effects of Health Status on Household Portfolio Choice, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/182529
