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Unemployment Risk, Portfolio Choice, and the Racial Wealth Gap

Author

Listed:
  • Ellora Derenoncourt

    (Princeton University)

  • Chi Hyun Kim

    (University of Bonn)

  • Moritz Kuhn

    (University of Mannheim)

  • Moritz Schularick

    (Kiel Institute for the World Economy and Sciences Po)

Abstract
Black Americans face higher cyclical unemployment risk than white Americans: job-finding rates during recessions are lower and the risk of becoming long-term unemployed is higher. Differences in unemployment risk across Black and white Americans imply that Black Americans optimally invest less in risky assets. We show that differences in unemployment risk can explain up to 90% of the gap in the stock market shares of Black and white portfolios, resulting in lower returns on wealth for Black Americans. Through this portfolio channel, adverse labor market conditions for Black Americans translate into lower wealth returns and exacerbate racial wealth inequality.

Suggested Citation

  • Ellora Derenoncourt & Chi Hyun Kim & Moritz Kuhn & Moritz Schularick, 2023. "Unemployment Risk, Portfolio Choice, and the Racial Wealth Gap," ECONtribute Discussion Papers Series 265, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:265
    as

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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_265_2023.pdf
    File Function: First version, 2023
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