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Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk

John Heaton and Deborah Lucas
The Journal of Finance
Vol. 55, No. 3 (Jun., 2000), pp. 1163-1198
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/222449
Page Count: 36
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk
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Abstract

Using cross-sectional data from the SCF and Tax Model, we show that entrepreneurial income risk has a significant influence on portfolio choice and asset prices. We find that households with high and variable business income hold less wealth in stocks than other similarly wealthy households, although they constitute a significant fraction of the stockholding population. Similarly for nonentrepreneurs, holding stock in the firm where one works reduces the portfolio share of other common stocks. Finally, we show that adding proprietary income to a linear asset pricing model improves its performance over a similar model that includes only wage income.

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