Equity Fund Ownership and the Cross-Regional Diversification of Household Risk

Would wider equity ownership help improve inter-regional consumption risk sharing between households? We use data from the Italian Survey of Household Income and Wealth to show that it would. Mutual equity funds are usually diversified at the national level. Cross-regional patterns of equity fund ownership are qualitatively consistent with simple portfolio theory: regions with more asymmetric business cycles are more diversified because they have higher fund participation rates (the extensive margin of diversification) and higher average holdings of equity funds (diversification’s intensive margin). Also, fund holdings increase with the exposure of non-tradable income components (such as labor or entrepreneurial income) to regional shocks. We conclude: yes, increased equity market participation could substantially improve interregional risk sharing.