Open Access Journal Article

Portfolio Allocation with Medical Expenditure Risk-A Life Cycle Model and Machine Learning Analysis

by You Du a  and  Weige Huang b,*
a
Department of Economics, Finance, and Accounting, Robbins College of Business and Entrepreneurship, Fort Hays State University, Hays, KS, USA
b
Faculty of Economics, Shenzhen MSU-BIT University, Shenzhen, China
*
Author to whom correspondence should be addressed.
JRE  2023, 10; 2(1), 10; https://doi.org/10.58567/jre02010005
Received: 25 May 2023 / Accepted: 6 July 2023 / Published Online: 11 October 2023
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Abstract

This paper explores how the medical expenditure risk affects the households’ portfolio choice across health status theoretically in a life cycle model and empirically using machine learning methods. Medical expenditure risk, as a background risk, has the potential to influence households’ financial decisions. A higher medical expenditure risk leads to a larger fluctuation and more uncertainty in households’ consumption and therefore utility. As a result, risk-free assets become more attractive. Our machine learning analysis provides evidence that aligns with the predictions of the theoretical life cycle model. Specifically, households with better health hold a larger proportion of stocks in their portfolios. Furthermore, when facing increased medical expenditure risk, households in good health demonstrate a greater willingness to invest in safe assets.

Keywords: Household finance; medical expenditure risk; life cycle model; machine learning;
Copyright: © 2023 by Du and Huang. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

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ACS Style
Du, Y.; Huang, W. Portfolio Allocation with Medical Expenditure Risk-A Life Cycle Model and Machine Learning Analysis. Journal of Regional Economics, 2023, 2, 10. https://doi.org/10.58567/jre02010005
AMA Style
Du Y, Huang W. Portfolio Allocation with Medical Expenditure Risk-A Life Cycle Model and Machine Learning Analysis. Journal of Regional Economics; 2023, 2(1):10. https://doi.org/10.58567/jre02010005
Chicago/Turabian Style
Du, You; Huang, Weige 2023. "Portfolio Allocation with Medical Expenditure Risk-A Life Cycle Model and Machine Learning Analysis" Journal of Regional Economics 2, no.1:10. https://doi.org/10.58567/jre02010005
APA style
Du, Y., & Huang, W. (2023). Portfolio Allocation with Medical Expenditure Risk-A Life Cycle Model and Machine Learning Analysis. Journal of Regional Economics, 2(1), 10. https://doi.org/10.58567/jre02010005

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