Abstract
We apply diversity indices, such as the Gini-Simpson index and entropy related indices, to the study of the distribution of individual asset holdings in the United States in 2007 and 2009. We examine the impact of the 2008 recession on asset diversity and the way individual socio-economic characteristics as well as important life events affect this measure. The focus of our analysis is on financial assets. We use a unique panel data set that provides us with comprehensive household level data for 2007 and 2009 in the United States—the Survey of Consumer Finances. We find that asset diversity increases between 2007 and 2009. In addition, it increases with age, education and income and it is lower at the bottom of the wealth distribution. Life changing situations such as getting divorced or losing one’s job have a statistically significant negative effect on a change in diversity, while getting married or having deteriorating health have a positive effect. Active money management also affects asset diversity positively.
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Notes
According to the official NBER (National Bureau of Economic Research) dates of the recession (December 2007 to June 2009; http://www.nber.org/cycles/), during this period the adjusted unemployment rate increased from 5 to 9.5%.
Risk is measured as the standard deviation of asset price fluctuations. Thus, by investing in assets whose returns are not perfectly correlated, individuals reduce the total variance of their portfolio return.
Almost 95% of the population holds some type of financial asset (see Table 8). The components of financial assets are introduced in Section 3.
Details on the collection and construction of the 2007–2009 panel are found in Bricker et al. (2015).
Financial assets are owned by over 94% of households. Details of ownership are in Table 8.
Their summary statistics are given in the Appendix, Table 7.
When addressing wealth endogeneity, the literature sometimes drops this control or the specific type of asset modeled is excluded from the aggregate measure and the remaining “aggregate wealth” distribution is used.
This is in contradiction to the predictions of classical portfolio theory.
In the particular case, where r = 1 in Eqs. (4) and (5), the individual diversity measure may be shown to correspond to the concept of entropy. It is then expressed as \(P_{j,entropy} = e^{ - \mathop {\sum}\nolimits_{k = 1}^K {\left( {\frac{{s_{jk}}}{{s_{j.}}}} \right)ln\left( {\frac{{s_{jk}}}{{s_{j.}}}} \right)} }\) Hackbart and Anderson (1975), as well as Attaran and Zwick (1987), for example, used this kind of entropy related measure to analyze economic or industrial diversification.
The results are available upon request from the authors.
Table 3 indicates that asset diversity increased for those that are actively engaged in changing their investment patterns.
We have excluded the remaining part of the sample, which amounts to 343 observations.
The correlation could not be computed in the case where r → 1.
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Acknowledgements
The authors would like to thank Brian Bucks, Christos Koulovatianos and those who participated at the 2016 Workshop on Household Finance in Luxembourg for helpful suggestions and comments on a previous version of this paper. This paper was revised, while Sierminska was on sabbatical leave at the University of Arizona, Department of Economics, which she thanks for its hospitality. The authors thank also participants to the annual meeting of the Society of Economics of the Household (SEHO), Paris May 23–24, 2018, as well as three anonymous referees for their very useful comments.
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Appendix
Appendix
The correlation could not be computed in the case where r → 1.
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Sierminska, E.M., Silber, J. The diversity of household assets holdings in the United States in 2007 and 2009: measurement and determinants. Rev Econ Household 18, 599–634 (2020). https://doi.org/10.1007/s11150-019-09472-z
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DOI: https://doi.org/10.1007/s11150-019-09472-z