Household portfolio choice before and after a house purchase

Abstract

Using a unique administrative panel data from Denmark, this article documents the dynamic evolution of households' financial wealth, the equity market participation rate (extensive margin), and the conditional risky asset share of financial wealth (intensive margin) over a 7-year period around a house purchase. We find that households' equity market participation rate falls during the year of house purchase. Conditional on participation, the risky asset share of financial wealth follows a V-shape around the house purchase. It decreases and reaches the lowest point 1 year before a house purchase, but jumps up immediately after. This finding suggests that of the three channels identified in the literature that are related to the risky asset demand after a house purchase, the debt retirement channel and the diversification effect dominate the liquidity concern.