Mean-Variance Econometric Analysis of Household Portfolios

We investigate households' portfolio choice using a microeconometric approach derived from mean-variance optimization. We assume that households have heterogeneous expectations on the distribution of excess returns and that they can't take short positions in the risky assets. Assuming two such assets, we derive an explicit solution of the model characterized by four possible portfolio regimes, which are analyzed using two structural probit and tobit specifications with three latent state variables. Both specifications are estimated by weighted maximum likelihood on a cross section of US household drawn from the 2004 SCF. The tobit specification is simulated in order to evaluate the regressors' effects on regimes probabilities and asset demands. We also asses to what extent the predicted state variables are consistent with the self-reported expected returns and risk aversion elicited from the SCF questionnaire.

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