The Importance of Debt for Household Risky Asset Allocation and Portfolio Structure

Abstract

When households decide on risky asset holdings, they do not make the decision in isolation from their debt structure and obligations, vice versa. We examine the joint behavior of debt and financial asset portfolio decisions, while existing empirical research on debt and asset portfolio choices has proceeded separately. In this paper, we first test the relationship between debt structure and asset allocation, then estimate the determinants of debt structure and asset allocation simultaneously. Using the 2016 Survey of Consumer Finances (SCF) data, we find robust evidence that debt structure affects households’ risky asset allocation decisions and identify, in this simultaneous decision-making process, the demographic and financial factors that can contribute to the household overall financial portfolio structure.

Keywords: Financial Asset Allocation; Risky Asset Investment; Secured Debt; Debt Structure

JEL Classification: G11; D14