Household life-cycle asset allocation and background risk of labour income

Purpose - The purpose of this paper is to empirically analyze the relationship between risky asset allocation and background risk of Chinese residents. Design/methodology/approach - Using Chinese macroeconomic data, this study uses numerical method to solve dynamic stochastic optimal problem. Findings - When risk of labor income is considered, ratio of risky asset declines with rising of age for those people with same age and wealth state; any of the following situations will lead to lower risky assets holdings: lower labor income growth expectations, higher labor income risk or higher labor and financial market covariance risk. Research limitations/implications - This study uses real economy investment return as a proxy of risky asset return. Practical implications - Residents with higher background risks should hold less risky assets, and overcome home‐bias problem during asset allocation. Originality/value - This study takes two kinds of background risk into consideration: labor income risk, and covariance between labor income and risk asset.