Essays on Household Finance

This dissertation represents the culmination of my PhD studies at the Department of Finance at Copenhagen Business School. It comprises three distinct chapters, each examining different aspects of households’ financial decision-making. These chapters are designed to be self-contained and can be read independently of one another.
In the first chapter, “Asset allocation of pension funds and households’ stock market participation” (co-authored with Ulf Nielsson, Jesper Rangvid, and Ofer Setty), we investigate how households adjust their non-pension portfolios in response to significant changes in the equity exposure of their pension portfolios. Standard economic theory suggests that households, considering the risk of their total portfolio, would decrease the risk in their non-pension portfolios in response to an increase in the riskiness of their pension portfolios. However, we propose a model illustrating how equity exposure through retirement savings can instead lower barriers to stock market entry for non-retirement savings, thereby increasing overall equity exposure rather than balancing it. We investigate this empirically, and use proprietary data from a Danish pension fund, where some members experienced a substantial increase in their equity exposure, combined with data from Statistics Denmark on their non-pension wealth. Our findings support our model, showing that following an increase in the stock-market exposure of their retirement portfolios, households also increase the equity exposure of their non-retirement portfolios.
In the second chapter, “Asymmetric Effects of Inflation Expectations on Consumption”, I explore whether households’ consumption is more affected by expectations of higher inflation compared to lower inflation. Standard macroeconomic models posit that inflation expectations symmetrically influence consumption decisions. In contrast, I develop a model of ambiguity-averse households, where a preference for low inflation leads to asymmetric responses: household consumption is more responsive to inflationary signals than disinflationary ones. I test this using survey data on inflation expectations combined with administrative data from Statistics Denmark. The results reveal that expectations of higher inflation have a six times greater impact on household consumption plans than expectations of lower inflation. This suggests that unconventional monetary policy aimed at managing household expectations are more effective when inflation is low.
In the third chapter, “Active or passive: Deposit investments of individual investors” (co-authored with Linda Sandris Larsen, Ulf Nielsson, and Jesper Rangvid), we examine how households manage their deposit holdings (for many their sole financial asset) in response to significant liquidity shocks. Our findings indicate that deposit investors are active, as they significantly reduce their deposit holdings following an exogenous increase caused by unexpected inheritances and reallocate a portion of the inherited funds to higher expected-return assets, such as stocks and bonds. Additionally, we find that households without voluntary unemployment insurance hold more deposits and heavily draw from their deposit accounts in the event of unemployment, indicating that deposits serve as a substitute for unemployment insurance. Overall, our findings suggest that households actively manage their deposit holdings and use the holdings they have as a precautionary measure.