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Author: Angerer, Xiaohong W.
Resulting in 2 citations.
1. Angerer, Xiaohong W.
Empirical Studies on Risk Management of Investers and Banks
Ph.D. Dissertation, Department of Economics, The Ohio State University, 2004
Cohort(s): NLSY79
Publisher: UMI - University Microfilms, Bell and Howell Information and Learning
Keyword(s): Assets; Human Capital; Income Risk; Labor Economics; Risk Perception; Risk-Taking

This dissertation is composed of two empirical studies on risk management. The first part focuses on investors' risk management; it is an empirical study of how investors' labor income risk affects their investment in risky assets. The second part of the study focuses on banks' interest rate risk management and also investigates how their interest rate risk management strategy affects their risk and return in the stock market.

Recent theoretical work has shown that uninsurable labor income risk likely reduces the share of risky assets in an investor's portfolio. Little empirical work has been done to examine this effect. The first study of this dissertation fills the void by investigating the relationship between portfolio shares and labor income risk in the NLSY79 data. The work has three novel features. First, the long labor income history in NLSY79 is used to estimate the labor income risk. Second, the study distinguishes between permanent labor income risk and transitory labor income risk, and estimates them for each individual rather than for groups. Third, I explicitly consider human capital as a component of an individual's portfolio. Human capital is treated as a risk-free asset and estimated by applying signal extraction techniques to individual labor income data. The study finds strong empirical support for the theory that labor income risk indeed significantly reduces the share of risky assets in an investor's portfolio. Furthermore, as economic theory suggests, permanent income risk has a significant effect on portfolio choice while transitory income risk has little effect. By implication, empirical work that does not distinguish between permanent income risk and transitory income risk will underestimate the effect of labor income risk on portfolio choice.

The second part of the dissertation is to fill the gap in the empirical literature on banks' interest rate risk management. Using a rolling sample of bank holding companies from 1986 to 2002, the study investigates how banks adjust their balance sheet maturity structure according to their perception of current and future interest rate changes. Banks tend to lengthen the maturity of net assets when the yield curve is steeply sloped and shorten it when they expect the interest rate to increase in the future. To account for the off-balance-sheet activity effect on banks' interest rate risk exposure, the sample is divided into those with high and low interest rate derivative activities. For banks with little off-balance-sheet interest rate derivative activities, the cross-sectional variation in responsiveness of maturity structure to interest rate changes explains the stock market risk and returns of banks' common equities. The interest rate risk management strategies reflect the extent of risk taking and are priced in the stock market. This finding contributes to the asset pricing literature by linking banks' stock market characteristics to their interest rate risk management strategies.

Bibliography Citation
Angerer, Xiaohong W. Empirical Studies on Risk Management of Investers and Banks. Ph.D. Dissertation, Department of Economics, The Ohio State University, 2004.
2. Angerer, Xiaohong W.
Lam, Pok-Sang
Income Risk and Portfolio Choice: An Empirical Study
Journal of Finance 64,2 (April 2009): 1037-1055
Cohort(s): NLSY79
Publisher: Wiley Online
Keyword(s): Earnings; Financial Investments; Income Dynamics/Shocks; Income Risk; Life Cycle Research

Permission to reprint the abstract has not been received from the publisher.

This paper investigates the relationship between portfolio choice and labor income risk in the National Longitudinal Survey of Youth 1979 Cohort. Permanent income risk (variability of shocks to income that have permanent effect) significantly reduces the share of risky assets in the household's portfolio, while transitory income risk (variability of shocks with no lasting effect) does not. This result provides strong evidence that households' portfolio choices respond to labor income risks in a manner consistent with economic theory.
Bibliography Citation
Angerer, Xiaohong W. and Pok-Sang Lam. "Income Risk and Portfolio Choice: An Empirical Study." Journal of Finance 64,2 (April 2009): 1037-1055.