THE LACK OF HOUSEHOLD PORTFOLIO DIVERSIFICATION IN ITALY

Despite what portfolio diversification offers, portfolios of many Italian households are not well diversified. The breadth and significance of poor diversification is documented anew in this paper using the Survey of Household Income and Wealth data by the Bank of Italy. The reasons for the lack of diversification can be found into the existence of unobservable barriers that prevent many households from investing in any assets. These constraints can vary according to economic and demographic characteristics of households and the socio - economic environment where they live. By resorting to a multivariate latent class analysis it is possible to detect the unobservable constraints on an array of financial assets categories simultaneously. Our methodology allows to classify the population of investors into unobservable sub-groups determined on the basis of the unobservable constraints. With respect to the existing literature, where investors are considered as a single group and the portfolio diversification is evaluated by referring to all households, we introduce a strategic distinction. Furthermore, instead of traditional estimation methods, we employ a Bayesian approach for its flexibility in terms of number and type (discrete and continuous) of covariates and the use of a priori information. Finally, our results provide powerful insights about the effects of social, demographic, economic and financial characteristics on the portfolio choices, thus allowing to correctly analyse the household’s investment decisions.