Household Securities Purchases, Transactions Costs, and Hedging Motives

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Abstract
This paper estimates threshold (S,s) models of household securities purchases, allowing for transactions costs. Purchases are related to excess market returns, the ratio of securities holdings to total wealth, and other variables capturing labor market and demographic transitions. Purchases are also related to various summary measures of households? hedging motives. In contrast to previous focus on income risk, the measures here include consumption-risk, which is more consistent with theoretical models of portfolio choice. The Consumer Expenditure Survey is used to calculate the standard deviation of household consumption growth and the correlation of consumption growth with market returns. A second, higher frequency set of measures is taken from the monthly Michigan consumer sentiment surveys. The survey questions have households themselves identify the financial risks they believe they will face in the future, and so provide more informative and forward-looking measures of their hedging motives. Securities purchases are found to increase with excess market returns and decrease with the securities-to-total-wealth ratio. Even controlling for these variables, securities purchases vary significantly with the measures of hedging motives. Household with more volatile consumption, or a larger consumption-return correlation, buy fewer securities. Households that are pessimistic about the future, expecting a deterioration in financial conditions or an increase in unemployment risk, also buy fewer securities. The marginal effects of the hedging motives are greater than the marginal effect of returns. However, the sensitivity of investors to returns has increased in recent years, even controlling for changes in the composition of investors.

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