Habit Formation and Persistence in Individual Asset Portfolio Holdings

This paper uses six waves of the Bank of Italy Survey of Households Income and Wealth to explore the dynamics of asset portfolio ownership. The household asset portfolio decision is a choice among discrete alternatives, and I model the problem in a multinomial framework. I focus on a particularly important feature of household portfolio behavior: the infrequency of portfolio allocation changes. I find evidence of strong unobserved heterogeneity through time-varying error components, which I interpret as taste persistence in both the risky and safe asset participation decisions. I estimate the model using the method of maximum smoothly simulated likelihood.Asset management;Stock markets;Economic models;bonds, financial assets, correlation, probability, probabilities, covariance, survey, equation, statistics, stock market, correlations, government bonds, autocorrelation, integral, econometrics, heteroscedasticity, financial markets, dummy variables, stockholders, integrals, corporate bonds, binary choice, significance levels, savings deposits, foreign stocks, structural analysis, zero-coupon bonds, cumulative distribution function, standard errors, stock ownership, coupon bonds, goodness of fit, foreign bonds, binary choice model, optimization, financial innovation, predictability, probability density function, statistic, treasury bonds, sample selection, normal distribution, computational complexity, estimation procedure, data analysis, probability density, sampling, maximum likelihood estimation, covariances, estimation method, statistical models, financial economics, stock market fluctuations