Investment in high return risky assets is an important factor in households'future economic well-being, especially in terms of their potential retirement adequacy. By using the 2004 Survey of Consumer Finances, this study examines whether there is a close linkage between the choices and levels of different types of risky assets owned by American households. The analysis can be divided into two parts:risky asset selection and asset allocation. First, based on the assumption that households make decisions of portfolio selection and allocation from their overall expectation of investment return, this study estimates the interdependent relationship of household risky asset selection in financial and nonfinancial asset categories by using a Bivariate Probit model, which estimates the determinants of two types of ownership of household risky assets simultaneously on the conditional probability of other risky asset ownership, while other household characteristics are controlled. Based on that result, the research further investigates the determinants of household asset allocation by looking at the shares of each type of risky asset of total assets respectively by utilizing two sets of Tobit analyses, while controlling for the effect of the other alternative risky assets investment on each asset category.
The key findings from the analysis of the household demand of financial risky assets with consideration of household nonfinancial risky asset investment support the proposed hypothesis that background income risk resulting from households' nonfinancial risky asset investment has substitution effect on household financial risky asset investment. Households with investment in private business or investment real estate invest significantly lower proportions of their assets in stocks, and the more they invest in those nonfinancial risky assets, the less that they invest in stocks.
This research contributes to the literature in this regard by providing a direct estimation of potential interdependent relationship of household risky asset selections and a comprehensive empirical study to examine the overall determinants of households'financial risky assets and nonfinancial risky assets. This result has important implications for future research and professional practice as well.