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Portfolio Selection by Households: An Empirical Analysis Using Dynamic Panel Data Models

June 8, 2017
Yuichiro Ito*1
Yasutaka Takizuka*2
Shigeaki Fujiwara*3


This paper investigates the mechanisms that influence household portfolio selection using Japanese and US household survey data, based on dynamic panel data models. The results show that as the classical portfolio theory indicates, the expected value of excess return on risky assets, market volatility, and relative risk aversion are important factors in household portfolio selection, for both Japanese and US households. Moreover, entry costs such as financial literacy have an indispensable effect, as well as households' various constraints, including liquidity and precautionary saving motives. Next, we examine the difference in household portfolio selection between Japan and the USA to explore the reasons why Japanese households have a cautious investment stance. The results indicate that the difference is partly explained by the differences in the relationships between risks and return in the market along with concerns about the future, but financial literacy and structural factors are also important determinants. This suggests that further improvements in institutional aspects and an increase in financial knowledge, as well as an improvement in market performance and the mitigation of future concerns, are important factors in making investment environments in Japan more attractive.

JEL classification
C33, D14, D81, G11

portfolio selection; household survey; dynamic GMM; portfolio selection mechanism; relative risk aversion; financial literacy

This research utilizes the micro data from the Preference Parameters Study of Osaka University's 21st Century COE Program 'Behavioral Macrodynamics Based on Surveys and Experiments' and its Global COE project 'Human Behavior and Socioeconomic Dynamics'. We acknowledge the program/project's contributors: Yoshiro Tsutsui, Fumio Ohtake, and Shinsuke Ikeda. And we wish to thank the Central Council for Financial Services Information for providing the requisite data. We also would like to thank the staff of the Bank of Japan for their helpful comments. Any errors or omissions are the responsibility of the authors. The views expressed here are those of the authors and should not be ascribed to the Bank of Japan or its Monetary Affairs Department.

  1. *1Monetary Affairs Department, Bank of Japan
  2. *2Monetary Affairs Department, Bank of Japan
  3. *3Monetary Affairs Department, Bank of Japan


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