Abstract: This paper studies how environmental risk affects household portfolio allocation and wealth outcomes in Europe. Using microdata from the Household Finance and Consumption Survey matched to regional measures of air pollution, we examine whether exposure to environmental risk acts as background risk and induces households to hold more liquid assets. We also test whether this response is shaped by the composition of household balance sheets, in particular by the prominence of housing as a dominant, illiquid asset. Our results suggest that higher pollution exposure is associated with greater precautionary liquidity holdings, while evidence on risky-asset participation is weaker. We further find that the liquidity response is attenuated among households whose wealth is more concentrated in housing, consistent with the view that housing illiquidity constrains portfolio adjustment. These findings highlight the role of environmental risk in household financial behavior and suggest that climate-related exposure may affect wealth accumulation not only through house prices but also through balance-sheet adjustment and financial constraints.
Author: Myrto KASIOUMI, Andros KOURTELLOS, Stephanie MICHAEL
Keywords: Environmental risk; air pollution; household portfolios; precautionary savings; liquidity; housing wealth; background risk; financial constraints; wealth inequality; HFCS