What is the impact of wealth shocks on asset allocation?

Abstract

The deviation from the assumption of constant relative risk aversion implies that wealth shocks generate transitory variation in risk aversion and, possibly, portfolio re-allocation over time. I analyze this relationship for the U.S. and nd evidence that is consistent with counter-cyclical risk aversion. I also show that: (i) housing assets are typically used as an hedge against adverse wealth uctuations; (ii) wealth e¤ects on asset allocation are signi cant and there is no evidence of inertia; and (iii) changes in expected future returns partially explain variation in the risky asset allocation.