Idiosyncratic asset return and wage risk of US households

Abstract

This paper documents the degree of idiosyncratic asset return heterogeneity, serial correlation, and correlation with wage heterogeneity for US households. Novel panel-data measurements for returns on household assets are proposed. Sizable transitory idiosyncratic return heterogeneity is documented to exist concurrently with permanent heterogeneity in household-specific returns. On average, idiosyncratic permanent risk to wages and transitory risk to total asset returns are correlated. This arises primarily from correlated wage and return risk to primary housing assets, and is dependent on age and wealth. The estimates inform the covariance structure of idiosyncratic asset return and wage heterogeneity.