Health status and portfolio choice of homeowners and renters over the life-cycle Abstract
Although previous literature has studied the relationship between health and portfolio choice, little research has been done to incorporate both health and homeownership status in the household financial asset allocation problem. In this paper, we try to address this gap by investigating how self-perceived health status interacts with the portfolio choice of homeowners and renters over their life-cycle, and how different this relationship is between these two types of homeownership status. First, we develop a dynamic optimization life-cycle model for the joint determination of health investment, housing, and portfolio allocation, in which individuals face labor income risk while working, and house price risk, stochastic stock returns as well as health risk over the life-cycle. Second, using data from the Panel Study of Income Dynamics (PSID), we also perform empirical analysis to examine whether the empirical findings support our life-cycle model predictions based on the policy functions and simulation results. Our results indicate that the life-cycle model can explain key facts about stockholding profiles of homeowners and renters across different levels of health status in PSID. The proportion of total wealth in stocks is low overall and is positively related to health for both homeowners and renters. However, we find that renters’ share of total wealth in stocks responds more strongly to the deterioration of health status.
Keywords: Portfolio choice, life-cycle model, health expenditure, health status, homeownership