Essays on consumer portfolio choice and credit risk

Three essays comprise this dissertation. The first essay uses panel data to show that labor income risk alone cannot explain limited stock market participation. However, transaction costs and household demographics, considered jointly, can determine both the discrete choice of whether to hold stock and the amount held, conditional on whether the household is already investing in the stock market. Transaction costs are proxied by state-level number of brokers per capita. The second essay builds on the first essay. I measure two different covariance terms. One is between self-evaluated house value and uninsurable labor income risk. The other is between housing investment return and stock return. The results show that homeownership has a diversification effect on stock holdings. This effect occurs because adding a house to the household portfolio can significantly decrease the overall risk of the portfolio. The last essay empirically shows that unemployment is significant in determining both consumer bankruptcy filings and delinquency even after controlling for household demographics. Furthermore, I show that unemployment and the debt/wealth ratio also affect the choice of whether to file for bankruptcy under chapter 7 or chapter 13, after controlling for demographics. The paper then points out some of the implications the empirical results have for policy-makers and banking regulators