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Current literature on the effect of labor income on portfolio choice overlooks that workers face a risk of being forced to retire before their planned retirement age. Using data from the Health and Retirement Study, this paper finds that the forced retirement risk is both significant and highly correlated with stock market fluctuations. Using a life-cycle portfolio choice model, this paper shows that forced retirement risk makes labor income near retirement stock-like. Therefore, contrary to conventional wisdom, those who are still working but near retirement should have a lower share of risky assets in their financial portfolios than retirees do.

The U.S. housing market is heterogeneous in that house price dynamics vary greatly across regions. Depending on the location of the main residence, households are exposed to completely different housing market risk. This paper examines how geographic heterogeneity in housing market risk affects household portfolio allocations. Housing supply elasticity largely explains variation in housing market risk across regions. Where housing supply elasticity is low, households face higher housing market risk since house price growth rates are more volatile and more positively correlated with stock returns and labor income growth rates. Using the restricted version of the Health and Retirement Study (HRS) data with detailed geographic information, I find that households in areas with low housing supply elasticity tend to hold less stock in their portfolios. This tendency, however, weakens after retirement when labor income risk disappears.

In a state with non-recourse mortgage law, borrowers have limited liability on their mortgage loan. Examining price discontinuities at state borders, we show that non-recourse law causes larger swings in housing prices by encouraging speculative investments when housing markets are in a boom cycle. Non-recourse states experience 3 percentage points higher annual growth during the boom period and 3 percentage points steeper annual drop in housing price during the recession. We find that the emergence of the originate-to-distribute (OTD) model in the housing markets enables lenders to effectively shift the risks to other investors, mortgage lending pricing does not fully reflect the higher risk in non-recourse state.