Peking University, April 16, 2022: According to the standard theory, households save more money, work more, or adjust their financial portfolios in response to income risks. Recently, Wang Yicheng, an economic assistant professor of Peking University HSBC Business School has studied the last channel empirically and quantitatively, in cooperation with Yongsung Chang and Jay Hong, professors of Seoul National University, Marios Karabarbounis, an economist of the Federal Reserve Bank of Richmond, and Zhang Tao, a senior economist of the University of Oslo. Their collaborative paper “Income Volatility and Portfolio Choices” was published in Review of Economic Dynamics (Volume 44, April 2022, Pages 65-90).


Review of Economic Dynamics is a quarterly peer-reviewed academic journal published by Elsevier. It is recognized as a world-class journal in the field of macroeconomics, with an impact factor of 1.791.

In the study, the authors collected official Norwegian households’ income and wealth data, data about labor market status, demographic characteristics, and employer information over the past 30 year from Statistics Norway. Using this administrative panel data, they constructed a quantitative structure model based on heterogeneous micro-agents and conduct counterfactual analysis. The benchmark model can predict the relationship between household income volatility and their financial portfolio choices well: when income risk doubles, households reduce risky shares of financial assets by 5%. Their quantitative estimate is highly consistent with the empirical analysis. They also predicts that the social welfare gain will be about 4% if households’ income risk can be stabilized by policies, while it will lose about 1% if households are unable to adjust their financial portfolios.

The paper contributes to the study of income volatility shocks in three ways. First of all, the study’s sample size of the household consumption investment survey data is abundant, and the empirical results are relatively consistent and convincing. Secondly, it constructed a new quantitative structural model of portfolio choices, which creatively introduced idiosyncratic volatility shocks to the wage process. Finally, the article examined the wellbeing of different households, and how the progressive income tax system affects their financial portfolio choices.


Biography

Wang Yicheng is an assistant professor of economics of Peking University HSBC Business School. He received his Ph.D. in economics from the University of Rochester, USA. His main research fields are empirical and quantitative macroeconomics, heterogeneous agents and entrepreneurship. He has published many papers in internationally renowned journals such as Economic Dynamics, and is participating in significant research projects funded by National Natural Science Foundation of China.

Written by: Lean Zhixuan
Edited by: Ye Yimeng
Source: PKU News (Chinese)