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Abstract

This study reviews some household portfolio decision models and borrowing decisions from the extant literature. Household portfolio decisions entail the commitment of financial wealth across a broad range of financial instruments or securities to satisfy intertemporal consumption-investment objectives. Household financing or borrowing decisions, on the other hand, involve the raising of finance to procure specific household needs such as mortgage or a consumer good. Stock market participation (or risky assets participation); portfolio selection, diversification and delegation of portfolio management; portfolio rebalancing in response to market movements; and portfolio rebalancing over the life-cycle underpin household portfolio decisions. Household financing/borrowing decisions are reviewed within the context of credit availability; household mortgage; and mortgage defaults. The main findings are as follows. Fixed transaction costs and non-standard preferences such as ambiguity and loss aversion, are causes of limited stock market participation despite positive risk premium. The observed heterogeneity in household portfolio behaviour is due to disagreement about asset return distribution and need to hedge endowment risk. More sophisticated and more trusting investors are more likely to delegate portfolio management or seek financial advice. Stock market participation and the portfolio share invested in equity show a marked life-cycle pattern. Credit availability, credit market conditions, labour income shocks, relative attractiveness of investment opportunities over cost of borrowing are the primary factors influencing household borrowing decisions.