Return expectations and risk aversion heterogeneity in household portfolios

We develop a structural econometric model to elicit household-specific expectations about future financial asset returnsand risk attitudes by using data on observed portfolio holdings and self-assessed willingness to bear financial risk. Ourframework assumes that household portfolios are subject to short-selling constraints in stocks and bonds, and thatfinancial investment decisions are taken conditional on real estate and business wealth. We derive an explicit solutionfor the model, and estimate its parameters using the US Survey of Consumer Finances from 1995 to 2010. The resultsshow that our modified mean-variance model fits the data adequately, and that the demographic, occupational andeducational characteristics of the investors are relevant in shaping risk aversion and return expectations. In contrast,wealth, income, and past market performance have limited impacts on expectations and risk aversion.